To fix or not to fix?

Netnut

Hi all

I needs some advice, my 1st year mortgage rate is finished and i need to choose a new one. These are my options:

Variable 3.2
1yr fixed 3.45
2yr fixed 3.75
3yr fixed 3.85
4yr fixed 4.3
5yr fixed 4.35
10yr fixed 4.99

Should i fix or go variable? If fixed for how long?

I cannot change my lender (EBS), i have to stay with them for the next 3 years (dont ask)

Borzoi

Netnut wrote:

Hi all

I needs some advice, my 1st year mortgage rate is finished and i need to choose a new one.

How tight are things financially speaking? Will you get a raise in the next year/two?

Basicly if things are tight - go with a 1-2 year fixing, the surety that you have that rates will not bounce up 1-2% is worth the .5% premium. If on the other hand you could afford that rise, go variable.

djk1000

Just heard on the business news this morning that Ulster Bank are predicting a maximum rise of .5% in interest rates this year.

antoinolachtnai

The guy from the Ulster Bank also said that any rise would be in the latter half of the year.

Personally, I don't see the signs of recovery in Europe, or any sign of a gain in the value of the dollar that would make a rise likely this year, and I have heard eminent bond economists say the same thing. Of course, this is all really armchair philosophy, and you have to make up your own mind about it.

Since any rise probably wouldn't be until the latter half of the year, this makes the 1-year rate look like poor enough value (basically because the average of 3.2 and 3.7 is only 3.45, so there would have to be a full .5 percent rise before the sixth month of the year in order for you to possibly benefit, and this seems very unlikely).

If you do need the protection against interest rates hikes, I would go with the 3 year one. In this case, you are getting a reasonable period of protection for a relatively small premium (at least compared to the 1 year rate).

This would get rid of some uncertainty for you in the medium term. This is important because it is basically impossible for bond economists or anyone else to make any useful guess at interest rates more than a year or so in advance. Rates could well go flying up in 2006 if the dollar strengthens or Germany recovers, it's impossible to predict. On the other hand, if the middle east really goes bad, and the continental economy doesn't pick up, then you could certainly imagine the rate dropping another quarter or half.

The protection for the second and third years is worth a lot more than the protection for the first year.

Over the course of a mortgage, it will almost always work out more expensive on the whole to be on a fixed rate. This is because you are effectively buying a 'hedge' from the bank and this is being priced into the rate you pay.

Nuttzz

ebs tracker would probably be best, the fixed rate is generally higher than what they expect the market to rise to

Badabing

Last year i had the same poser as you, i went for 2 years fixed 3.75 with permenant tsb, fitted in my salary and outgoings.

antoinolachtnai

Nuttzz wrote:

ebs tracker would probably be best, the fixed rate is generally higher than what they expect the market to rise to

Well, that's not _quite_ true. The EBS probably determines its fixed rates on the basis of long-term borrowing rates and other trends on the money market. This means that it is the market as a whole that is taking a view on interest rates, not just EBS. It also means that EBS is taking no risk at all when it gives you a fixed rate - the loss is (probably) passed on to lenders who are prepared to accept the rate.

The way this works in practice is as follows. Basically, there's a Euribor overnight rate, but there's also a 1 month rate, 3 month rate, 1 year rate and so on. There is also a trade in futures and other 'exotic' instruments for interest rates. The building society bases its long-term rates on these, and uses them to hedge its exposure if appropriate.