Should I fix my interest rate or keep it variable?

Should you fix your interest rate? Unfortunately there is no black or white when answer, but consider this – fixed interest rates are set by the market place. The better the market place and the higher demand, the higher the price. This is the case for all things whether it be gold, oil, corn or money.

The banks do not lower their fixed, rates the market place does.  The market place fixes interest rates using financial derivatives (insurances) on top of variable interest rate products so the outcome over time is that fixed rates must be higher than variable rates.

But does that mean you shouldn’t fix your interest rate?

This really does depend on your position – even though it may cost more over time, insurance can be a comfort but in a time of reducing interest rates because of the global slow down the price of money will drop and if you have fixed your rates your cannot benefit any further.

Another consideration is the outlook over the period and the gaps in what you pay now and what rate you can fix at. What I mean is if you are paying 6.90% on a variable today and a 3 year fix is 6.99% and the market has just fallen what is the likelihood of variable rate increase or decrease?

50 basis points down will have your variable rate at 6.40 % so the rate increases before you get back to the fixed rate are plenty and rates only go up when things are improving . The best measure of the market’s perception is the 3 and 5 year rates and if they are dropping then the market is predicting a downward movement.  Now if things get bad and you need to sell a fixed rate will likely cost you money to break out of and the longer you have fixed the more it will cost – think up to and above 10% of the loan amount.

Fixed interest rates do have their place depending on your circumstances and if it works for your situation. The bankers love fixed interest rates because they can lock you in and the new laws about exit fees don't apply to fixed rates.

Deciding whether to fix your interest rate or keep it variable is tough and the only way to make an informed decision is to have a clear picture of your financial position and get advice on the details of both your current home loan and any new home loan you look to enter into.