New Mortgage - to fix or to float

cbyr1983

Registered User
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47
Planning to draw down a mortgage. LTV in the 70s.

Figure I'll take my chances on the variable rate. Significant premium on the fixed rate at present.

I'm hoping the mortgage will be manageable enough for us to withstand a 2% rise in rates.

I work for a company that has hedged a lot of its debt over the last few years with fixed interest rate swaps and ended up way out of the money.

On the basis that the fixed rates are a function of expected future variable rates (standard interest rate swap valuation theory), I reckon there's generally a premium paid for hedging.

Advice sought. Particularly - can anyone de-mystify how the bank determines its fixed rate?
 
All things being equal (e.g. assuming you are looking at generally competitive rates in the first place) you will probably pay a premium for a fixed rate over a variable for a given period of time. If you are confident that you can comfortably cope with variable rate fluctuations over the given period of time then chances are you will be better off on variable. If you need the security/peace of mind of predictable repayments then you should consider going fixed and just (most likely) pay the premium for that. There are other pros and cons of fixed versus variable (e.g. fixed rate period breakage penalties, possible inability to make lump sum accelerated capital repayments on a fixed rate mortgage without penalties etc.). I don't have any insight into how banks set fixed rates but assume it's an actuarial matter?
 
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