Mortgage: Fixed or variable

Richards1983

Hi all,

Which of these would you go for, and why?

5 year fixed at 3.3%
or
Variable at 2.95%

I won't be selling the property any time soon. I've received two opposing opinions from friends who are financially minded.

Thanks so much,
Con

coylemj

Richards1983 wrote: »

I've received two opposing opinions from friends who are financially minded.

You know both of those people, they have some knowledge of the world of finance and they disagree. So why would you be interested in the opinions of anonymous people on the internet?

What you're talking about here is crystal-ball gazing.

Richards1983

Thanks Good point. Just wondering what people think.

368100

Ask yourself two questions about the fixed rate...

Would you be able to afford repayments if rate was to go up by 1%

Do you intend making significant overpayments to the mortgage?

Interest rate predictions are exactly that, largely a guessing game....even the experts get it wrong sometimes so i'd base my decision on the conditions of each option as much as the rate

Liam D Ferguson

Over a period of many years I've given the following advice to clients who were asking the same thing. If you can afford to pay the fixed rate at 3.3% then choose the variable rate and open a savings account into which you put the difference between the 3.3% repayment and the 2.95% repayment. If the variable rate repayment increases, reduce the amount you're putting into the savings account. If it goes over 3.3% in the next 5 years, start taking money back out of the savings account.

Example - let's say that the 3.3% fixed rate repayment is €1,225 per month and the 2.95% variable rate is €1,179. (I based that on €250,000 over 25 years.) Go for the variable rate and save €46 per month into a savings account. If the variable rate goes up by 0.25% then the repayment will go up to €1,212. Reduce the monthly savings amount to €13 per month. If the variable rate goes up over €1,225, then start subsidising it out of the savings account each month.

Although anything can happen in the future, any clients that took that advice have always had money in the savings account at the end of the 5 years or whatever the fixed rate period was.

I don't try to predict the future movements of variable interest rates. Too many variables - nobody can do that. But do remember that fixed rates are priced by banks to make money for the bank. Not for you. Can you outsmart the guys and girls working for the banks who price their fixed rates? Maybe you can. Maybe you can't.

If the prospect of interest rate rises on your mortgage is going to have you lying awake at night, worrying, then by all means fix. But be clear that you're choosing to pay extra per month for the security of knowing what your repayment will be every month for the next five years. It's a bit like paying an insurance premium. I'd be far less enthusiastic about taking on a fixed rate solely because you are trying to beat the prevailing variable rate over the same period of time.

Richards1983

Liam -- what can I say? -- that's unbelievable advice. Thanks so much, really appreciated. I'm gonna do precisely that.