Mortgage Fixed or Variable - Advise

instinct

Hi,

I would like to get some advise on my current mortgage. The first 2 years I was fixed (@3.4%) but now that time is up and have some choices.

Go Variable @ 4.5%
2 year fixed @ 4.69%
3 Year fixed @ 4.98%
5 Year fixed @ 5.29%
10 Year fixed @ 6.19%

I have no real experience with this but with research I am hoping to make a wise decision. On the one hand Variable is the most attractive but considering the possibility of ECB interest hikes and also that Variable rates are more or less dictated by the Lender it does look quite risky that I am leaving myself wide open. How often do variable rates change ? Like the wind ?

So if I was to chose 2 years fixed I know what I am looking at for that time but then 2 years down the road you have to wonder what the rates on offer will look like. Will they be 6%+. Who knows. So with this in mind is it wiser to fix for longer 3/5 even 10 years. Pay higher now with the hope that in 2 years the fixed rates on offer are off the charts and be happy that I fixed @6%.

I am very interested to hear the advise from those better versed in this area then I am .

Many thanks

Tow

On 'Average' and 'Long Term', people on variable rate mortages pay less than those on fixed.

JonDoe

http://maxkeiser.com/2012/11/24/tam-1258-the-truth-about-shopping-stampedes-and-the-global-central-bank-run/



Listen from about 22:00 onwards, basically bond market bubble>>collapse>>>interest rate spike>>>this gets transferred to your mortguage.

I've got no skin in the game and I'm not a financial advisor (otherwise I'd look for a fee ) Take the pain now, get off a variable and go fixed for as long a term as you can.

donalg1

Well with a variable of 4.5% personally I would consider the 3 year fixed of 5%, generally when the rates go up they go up by 0.25% or that, so the risk you take of fixing for 3 years is that there will be more than 2 increases in the next 3 years.

In saying that though if there are 3 increases in that time you wont necessarily save money if those increases happen towards the end of the 3 year period, now if they happened early in the 3 years say in year 1 you could save some.

I like fixed as at least you know where you stand for that amount of time, but I do like budgeting and limiting risk or change.

roro2

Fixing rates usually comes down to personal circumstances - could you afford to pay more if variable rates rise? As said above, on average you will end up paying more on a fixed rate as you are paying for the security of fixed repayments, and you lose the flexibility of paying off more principal. It is unlikely that the ECB will increase rates above 0.75% in the next 2 years, with the next move more likely to be lower. Therefore, if you took a 2-year fixed rate, you would only benefit if the lender increased its variable rate without reference to the ECB rate. This has been happening recently, but no one knows if it will continue. Such an increase would also have to happen early on in the 2 years (e.g. if the variable rate increases to 4.75% after 1 year, the average rate over 2 years would still be 4.625%).

If it was me, I would be more inclined to look at a 5-year fixed as the probability of ECB rate increases over this timeframe are much more likely, but you would need significant increases to be better off over the full 5 years. If you don't need the security of fixed repayments, you could go variable and still retain the option of fixing later.

chris85

roro2 wrote: »

Fixing rates usually comes down to personal circumstances - could you afford to pay more if variable rates rise? As said above, on average you will end up paying more on a fixed rate as you are paying for the security of fixed repayments, and you lose the flexibility of paying off more principal. It is unlikely that the ECB will increase rates above 0.75% in the next 2 years, with the next move more likely to be lower. Therefore, if you took a 2-year fixed rate, you would only benefit if the lender increased its variable rate without reference to the ECB rate. This has been happening recently, but no one knows if it will continue. Such an increase would also have to happen early on in the 2 years (e.g. if the variable rate increases to 4.75% after 1 year, the average rate over 2 years would still be 4.625%).

If it was me, I would be more inclined to look at a 5-year fixed as the probability of ECB rate increases over this timeframe are much more likely, but you would need significant increases to be better off over the full 5 years. If you don't need the security of fixed repayments, you could go variable and still retain the option of fixing later.

ECB rate would not be a direct effect on the mortgage rate. It may influence the banks standard variable rate to a certain degree but the bank can easily increase rates when there is no corresponding increase in the ECB base rate.

roro2

chris85 wrote: »

ECB rate would not be a direct effect on the mortgage rate. It may influence the banks standard variable rate to a certain degree but the bank can easily increase rates when there is no corresponding increase in the ECB base rate.

Yes, as I pointed out. But they more often than not use an ECB rate increase as an opportunity to increase the SVR.

fricatus

Another option is to see what your repayments would be at 5.29% fixed, then take the variable rate, and overpay the difference.

So say you've got €200k borrowed for 30 years:
4.5% - payment is €1,073 per month
5.29% - payment is €1,109 per month

So in this case you take the 4.5% rate but pay €1,109 per month. That way you're overpaying €96 per month.

It mightn't sound like much, but in the scenario I've outlined, €750 of your initial €1,073 payment is interest, so in other words you're only paying off €323 in principal in the first month. By overpaying, you're eroding the principal on the mortgage at a faster rate (€419 in the first month) and you have security in the knowledge that the bank would have to increase its SVR by 0.75% before you'd see any increase in payments.

Will this happen in the five years that you'd have fixed for? Who knows? Certainly interest rates are at historic lows, but then again this is a recession of historic proportions.

I can tell you though that this is what I'm doing with my own mortgage, so in effect I'm putting my money where my mouth is. You'll need to sit down and do the sums (the =PMT function in Excel is great) and then decide what option is best for you.

instinct

thanks all. Prob will go on 3 year fixed and see how it goes.

Appreciate the feedback.