Whether to fix in the interest rate on your mortgage is one of the most vexed questions in personal finance.
Given the very large debts most of us carry, that’s no surprise. The stakes are high. And the answer is inherently uncertain.
No one really knows where interest rates are heading. Trying to guess when to fix and when not to fix is a bit like heading down to the TAB for a punt.
For most people, it’s not worth the hassle. The best strategy is just to regularly make sure you have negotiated the lowest variable interest rate possible and to ride out the storms that may come.
But I’m feeling lucky.
Last month, I paid a visit to my home loan manager to fix the interest rate on not all, but a large chunk of my mortgage. Essentially, I’ve placed a bet each way.
Of my $750,000 outstanding home loan, I’ve fixed the interest rate on $300,000 at 2.19 per cent for two years. The remaining $450,000 chunk remains on a variable rate of 2.69 per cent.
Taking a punt
Why did I do it? Basically, I’ve taken a bet that variable rates won’t fall by more than half a percentage point over the next two years. If they do fall by 50 basis points, that would bring my variable rate down to 2.19 per cent, leaving me no worse off. But if they fall by half a percentage point soon and keep falling, I’ll clearly be worse off.