Should I fix or should I go...(variable)?

Q:  It can be tricky to decide whether to fix your mortgage or stay on variable rates. What factors do I recommend people consider when making the decision (and what factors SHOULDN’T they consider)?

I think the concept of fixing needs to be positioned to people differently. I disagree with fixing of the rate based on a ‘theory’ that the rates will go up soon, and similarly not fixing because (we think) the rates will come down soon. This approach is based on timing the interest rate market – in other words, projecting which way the rates will go – and we all know that ‘timing the market’ is not a sound strategy and only leads to disappointment. Chasing the lowest rate or always paying the lowest rate can be nerve wracking, stressful and impossible. People can drive themselves into the ground worrying about it – mainly because it’s not something that we can control. I think the focus needs to be somewhere else; on things we can actually control and manage ourselves.

Don’t get me wrong, I’m not saying the rate is irrelevant. But as long as you pay a competitive or an average rate, you are doing fine. Every loan repayment requires careful consideration and quality advice. When it comes to debt people are being sold products (traditionally with an emphasis on a ‘current rate’) but not solutions. The rates will not pay off your home loan fast, a successful repayment strategy and debt repayment plan will.

As a planner, some examples of when we would consider with clients whether they should fix their home loan interest rate or not include:

-          During strategy considerations, for example where there’s a guarantor loan. As an example, in a guarantor situation a client might decide to fix, say, 80% of the loan on an interest-only basis to create certainty of having the same repayments for 5 years. We might then implement a 5-year plan to pay off the remaining 20% (the guaranteed portion) on principle and interest and a variable loan basis. Every client situation will be different, of course – this is just an example.

-          Any case where we need that certainty of having the same repayments while focusing on repaying the debt somewhere else (for example an investment property and home loan scenario, or where there is other personal debt).

-          A ‘Small Amount First’ repayment strategy – for people who get overwhelmed with the prospect of ever paying off large debts. We might fix a large amount of the loan and we then concentrate on paying off a small amount that we leave on variable rates and concentrate on paying off over, say, 3 years. Once that’s done we re-fix another small amount and repeat the process. People love it and generally do their best to achieve their small goals.

With our clients, we don’t really discuss the fixing part of things first. Rather we primarily agree on a repayment strategy that suits client’s situation and only then consider fixing their loan or part of it.

 Q: So who is ideally suited to a fixed and /or variable rate loan?

A person who understands that fixing or not fixing of the loan should never be considered based on “when’s the best time to fix”. It should only be considered as part of their repayment strategy.

by Michal Bodi

Originally published on www.canstar.com.au Posted by Canstar Research on 27/09/2013

Picture courtesy of cooldesign & freedigitalphotos.net