Finance Tips

Variable or Fixed - Should You Fix Your Loan When Interest Rates Rise?

By admin ⋅ March 28, 2008 ⋅  Email this post ⋅  Print this post ⋅ Post a comment

Are you purchasing or looking at refinancing and thinking about a fixed rate mortgage? Interest Rates are the highest they’ve been in years and we’ve had several rate rises in the last 8 months!! You can watch the news, read the papers, or see your financial advisor but the reality is that nobody really knows what is going to happen in the short term. Whatever you hear is just somebody else’s opinion!! So when will it end and is it the right time to consider fixing your loan??

always make sure you can make additional repayments with your loan product

It is nerve-wracking with continual rate increases!!

However, fixing your interest rate now could cost you more in the long term! Interest rates move in cycles and fixing at the wrong period in the cycle can see you paying more than if you had left it as variable. You see, fixing your loan for 2, 3, or 5 years is a long time and a lot can happen in that time! The common question you always hear is “Has the horse already bolted?” and when it comes to fixing your loan you would have to say YES it has!! Realistically fixing your loan a year or two ago would have been the answer but hindsight is a wonderful thing!! So fixing now at a high rate will cost you if and when rates begin to stabilize and even decrease again.

Banks love you fixing your loan do you want to know why??

In general, fixed rates already have several rate rises built into them. You are paying for stability or less risk!! You are already paying a higher interest rate and secondly there is no flexibility with making extra payments. Banks make their money by keeping you on the books as long as they can and would rather you pay the highest interest rate possible and you are doing this with a fixed rate with no flexibilty to further reduce your balance!! Not to mention the fees they will charge if you wish to change lender! Who wants to be locked into a rate at the peak without having the ability to make additional payments??

A combination of both fixed and variable is a good solution

In recent times of unstability, you may be 100% correct in fixing your whole loan or you may be 100% wrong if rates begin to fall. Why not have a combination of both and at least be 50% right?? A lot of products let you fix a portion of your loan amount while the rest can remain as variable. The advantage of this is you can make additional payments to the variable portion as you need to, while you also have the stability of your fixed portion!

Be smart and don’t panic!!

As I’ve stated in previous posts, I believe in reducing your mortgage as soon as you can, and you can still do this with a combination of both fixed and variable rates. With only a fixed rate, you cannot make additional payments and if rates do level off or fall you are stuck paying a higher rate!! Reducing your risk is the goal and in volatile times it may pay to spread the risk by splitting your loan into both fixed and variable rates!