With some banks offering some pretty low fixed rates at present, I thought I’d ask the obvious question – what do you think is the main reason people opt for a Fixed Rate over a Variable Rate on their mortgage?
Well an article in an online industry journal I was reading recently seemed to be discussing how borrowers are unlikely to save money if they opt to take out a Fixed Rate right now against a Variable Rate. By this I presumed that the article was suggesting that the primary reason people choose fixed rates over variable rates was so that they could save money. Which I just don’t think is necessarily correct.
Don’t get me wrong here, I’m not arguing that fixed rates are necesarily better than variable or vice versa. But in coming to its conclusion, the article seemed to me to be using a generous measure of historical statistical averages to support its fundamental premise. The only trouble is, the reasoning behind a decision for fixing rates, seemed to be missed completely.
Why do people choose a Fixed Rates in the first place?
From my experience the decision to fix your rate is usually not based on chasing a lower rate and saving money. It simply can’t be because traditionally Fixed Rates work out higher over the long term than Variable Rates. What we are seeing right now is a bit of an unusual phenomenon.
The very premise of fixing your loan to save money suggests you are taking some kind of gamble with the banks. Perhaps some people are betting that they can win. But if there is a winner then there must also be a loser as well. I can tell you that the banks invest a lot of time and effort in making a profit so it’s unlikely you will ever beat the banks by trying to pick rates. And like any form of gambling it carries enormous risk.
The property investors I know generally don’t like risk.
So if saving money is not the primary reason, why else would someone fix their rate?
Most property investors I have dealt with over the years, generally want to fix their rate for the certainty it provides and the confidence they get from having set repayments for a given term. A property’s costs can become quite stable when you lock-in a fixed rate.
Remember too, that the decision to fix your rate can only be assessed correctly based on what you think you will want to do with your property. It’s pointless taking out a 3 Year Fixed Rate if you plan to renovate a property and turn it over within twelve months. It wouldn’t make a bit of difference if the rate was the best you had ever seen. It just wouldn’t suit your purpose.
I like to look at it this way. When considering taking on a Fixed Rate you should ask yourself whether you would continue to be comfortable with your fixed rate if you saw the variable rate drop below it. If you are able to answer in the positive then you won’t panic if rates fall. On the flip side you will have a big smile on your face when they go up.