Fixed Vs. Floating: Don’t Just Rely on Hindsight

Benjamin Franklin was once quoted as saying, “In this world nothing can be said to be certain, except death and taxes." Of perhaps equal certainty, is that interest rates will always go up and down. Jaimie encourages us to make some deliberate steps in uncertain times.

 

Hindsight is a wonderful thing, but sadly unavailable to us when it comes to projecting into the future to see what interest rates will do before choosing to fix or to float. Of course you will feel very good about yourself if rates increase after you’ve fixed, but how will you feel if they moved in the opposite direction?

 

Putting the crystal ball aside, the very best answer to the dilemma of fixing versus floating will most likely come from your own gut feeling. What I mean is this: If you fix, you are giving yourself certainty over this period. You might be in a position where you need to plan your finances and need the assurance that the cost of your mortgage will remain the same.

 

However, if you are expecting a short-term windfall, maybe a work bonus or an inheritance, or if you are the person who likes to take a punt and believes that rates will continue to trend downward, then maybe floating (or at least a percentage of your mortgage on floating) is the right option for you. If you are considering selling in the immediate future then the floating rate or possibly a short-term fixed rate may also be the answer.

 

These are the motivations that might cause you to fix or float aside from the current climate of interest rates, but what would should you do right now?

 

Debt reduction is always at the forefront of my mind and, with interest rates currently at an all-time low, it would be a shame to not make the most of it by knocking off as much as you can.

 

Even if you’re only able to pay a little beyond the minimum payments you will be amazed how much of your loan you can pay off while rates are low. And, if you think you’ll also be in the position to make any additional lump sum payments, it’s important to have a portion of your loan in a facility that allows you to do this without penalty.

 

There may be a lot happening in the financial world both internationally and domestically, but it’s still unlikely there will be any drastic movement in mortgage rates here within the next 12 months. So having a portion of your loan fixed short-term will give the certainty of a good rate now and the benefit of re-evaluating again in the near future … perhaps with the assistance of a little hindsight.

 

If you would like further advice, as always, don’t hesitate to contact your Velocity Adviser.

 

Jaimie McDonald is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.