STOP PRESS: To fix or not to fix??

The fixed rates are rising at a rapid rate. Variable rates are still very low being under 5.5% but the 3 and 5 year fixed rates are up around the 7-7.5% mark (and rising) with many of the well known lenders. That's a big difference!


So should you fix or should you stay on a variable rate?


Well, I'm not a financial planner and I'm not an economist so in no way can I give you the right answer for your specific situation, nor can I tell you what's going to happen to variable rates in the future... I can however give you some pertinent points to help you decide what's right for yourself.


The theory goes that if you stayed on a variable rate (a basic rate or something similar under a professional pack) through the highs and the lows of rate changes, then over a period of 20 years or so you would be better off than if you had a 3 year fixed rate that rolled onto the next 3 year fixed rate at the end of every period.


So POINT 1 would be - over the long term it is likely that you would be financially better off by staying on a varable rate.


Hindsight shows us however that over a 1-5 year period there are many occassions when locking in a fixed rate would have saved you money.... The catch is, it's very difficult to predict when a fixed rate is going to pay dividends. If we had a crystal ball it would be too easy, but since we don't it really is a case of taking the information at the time of making the decision (media reports, economic updates and your own gut feel) and making the best decision you can - my estimate is that you'll likely save money a little less than 50% of the time.


Therefore POINT 2 is - when fixing a rate, sometimes you'll pay more, sometimes you'll save. Without a crystal ball it's a case of making the best decision you can based on the information available at the time of fixing.


So if you're not necessarily going to save, why would you fix? My thoughts are that there's no use being financially better off on the variable rate if during a period of high variable rates you can't actually afford to make the repayments! Nor would you be better off if you managed to make the repayments but ended up having a nervous breakdown due to the lack of sleep that was brought on by worrying about how high rates were going to go and how you are going to find the money to make the repayments if you're variable rate kept going up.


Which brings me to POINT 3 (which is a very important point) - fixing your interest rate should not be about beating the bank! (see Point 1 & Point 2). Fix for security, stability and if you want a "set-and-forget" solution to your lending needs.


Getting the best of both worlds...

If you like to hedge your bets and want to savour the benefits of the low variable rate while still protecting yourself against the challenges of much higher rates then you may like the idea of a "Clayton's Fixed Rate Loan". This is not an official term but it sets the scene for the option of the DIY style of fixed rate ...


Basically you determine what your repayments would be based on today's fixed rate (or call the VISIONTeam and we can calculate that for you) and then you change the repayments that you're making on your variable rate loan to the higher repayments.


Essentially you are still getting the cost savings of the low variable rate but you are making repayments as if the rate had risen and was fixed. The benefit is that if the rates rise more slowly than expected you just continue to make exactly the same repayments and over a period of time you will save lots on your interest. If the variable rate ends up rising higher than the "Claytons Fixed Rate" that you have set as your bench mark then you will have built up a buffer of extra funds that you can then draw on to reduce the impact of the now higher variable repayments that will be due.