Fixed or variable?

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In a “practice what you preach” moment, I’m currently reviewing my finances and part of that process involves addressing my mortgage. I’m happy with my current lender, but I’m left with a decision we all face; should I fix my interest rate?

I’ve never been one to try to ‘crystal ball’ the future. Logic tells me that, moving forward, interest rates can only rise.

I won’t however, pretend to be able to accurately predict the unknown variables of when they will go up, how fast, and whether they will come back down. The thing is, the banks, with much greater resources than I, are forecasting all of the above before setting a fixed rate to ensure they don’t miss out; it isn’t easy to beat the bank!

For me, the benefit of locking in my interest rate is that I know what my payment will be for a fixed period of time. I know that I can afford the payment and I can plan my finances around it.

History suggests that, over time, fixing rates is likely to result in a fractionally higher average rate. I’m happy to pay this premium for the certainty of knowing my payments won’t increase to a point that I’m unable to afford them.

There are some other disadvantages of the fixed rate option. There are limitations on the amount of additional repayments you can make and you may incur break costs if you exit the loan early.

The variable option is far more flexible and currently is lower than the fixed rates. Having a variable interest rate allows you to make additional payments as you see fit, provides the option to shop your loan around as you please and overall is less restrictive.

The downside is that your interest rate can change at any time.
In the end, I opted for a little of both! I already have my loan split in two; one portion (about 20 per cent) with a much shorter repayment period to force me to make additional repayments to reduce my debt quickly, and the remainder in a more traditional mortgage structure.

I decided I would fix the larger loan for five years to provide certainty in repayments for the foreseeable future.

The smaller loan I have left on variable, this also provides the opportunity to make additional repayments if we choose. This “best of both worlds” suits my situation, but is not the answer for everyone.

Like most things in life, the fixed versus variable decision is a trade-off. In this case we trade certainty for flexibility.

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