The fixed rate quandary

This article is really only pertinent in the current rate environment which is mid 2022 – with the Reserve Bank increasing interest rates increasingly borrowers are thinking of fixing to curb the increase.

The trouble with this thought is that the fixed rates are already higher – up to 2.5% higher – than some of the super sharp variable rates. So effectively you’re giving yourself a 2.5% rate rise from today, to avoid one in future.

This is quite apart from the necessary conversation about whether fixing suits your goals at all or whether it could be too restrictive for your future plans.

We're as uncertain as you are on this one because no one knows how far or fast rates will go up - I guess the question is anticipating will the variable rise over the fixed otherwise you've paid the higher rate from day one in anticipation that some time it will go higher and you will have saved money - or - the certainty of knowing it won’t gives great comfort. There is unlimited value in knowing you can afford your repayments and they won’t change for a period of time (while fixed).

There’s an alternative answer, and that is what if you artificially gave yourself a rate rise to, say, 4.45% pa now and started making those higher repayments into your variable rate loan – you’ll feel it now for sure but you won’t feel rate increases, and, you will have the benefit of the extra you’re repaying going into the loan building up your buffer vs giving a lender bonus interest. I understand completely this is a privileged comment to make and assumes there is room in your budget to do so – which is tough to do in current market when your grocery bills and fuel are already eating the budget.

And that brings us to the crux of the argument – its not actually mortgage stress or interest rates that are at fault here – all current lending has been assessed assuming a higher interest rate than you’re being asked to pay, the stress was aptly described by a colleague as “cost of living” stress and this just feels like a nasty slap after the fact.