Tuesday, 4 December 2012

To fix or not to fix

The financial press is generally lukewarm on the subject of fixed rate mortgages.  Studies cited by the press appear to show that on average customers are better off financially under variable rate loans.  I suspect these studies are skewed by the human tendency to panic when variable rates are rising.  In their panic to mitigate the rising rates, people lock in a fixed rate loan at the top of the interest rate cycle.  In fact, by taking a contrarian view and locking in a fixed rate at the bottom of the cycle, you could be better off with the fixed rate.

There are two primary reasons why you would want to fix your interest rate:
  • You want certainty over future payments
  • You think you can beat the market and that the fixed rate will be less on average than the variable rate over the fixed rate period
And in both cases, you would need to be comfortable with the restrictions that generally come with a fixed rate loan, namely:
  • Potential for early repayment penalties
  • Limited ability to make extra repayments
  • Lack of redraw and/or offset accounts
Some lenders have introduced fixed rate products with more flexibility, so you should definitely read the terms and conditions.