Sitting on the Fence

Hey team,

Yesterday we discussed the difference between fixed and variable rate mortgages. Fun times. The key message being, one provides you certainty (fixed) and the other flexibility(variable). And depending on which of those is more important to you, will dictate the way you swing. BUT, your choice doesn’t have to be so black and white. You can, as they say, play the field a bit. You can fix part of your mortgage, leaving the other part variable.

This is called the “sitting on the fence” strategy and has been made famous by  politicians the world over. Simply put, you don’t fully commit to anything. By doing so, you can never be 100% wrong. Ingenious.

If you go part fixed and part variable:

  • If interest rates go up, it’ll suck. But only the interest rate and therefore the repayments on the variable component of your loan will change.  The fixed component is not affected by interest rate changes by the RBA. So it’ll suck, but not that much.
  • If interest rates go down, it’ll be good. But, again, only the repayments for the variable part of your mortgage will fall. The fixed part will remain unchanged. So it’ll be good, but not as great as it could have been
  • You can still make additional repayments on the variable part of your loan at anytime

Therefore, adopting the sitting on the fence strategy, you get some flexibility and you get some certainty. A little from column A and a little from column B.

3 Super Important Things
First: I am not telling you to fix your entire mortgage
Second: I am not saying you should leave it all variable
Third: I am not pushing for a 50/50 (fixed/variable) split either

I am just showing you another way to think about it. The question you should be asking yourself is how susceptible are you to an increase in the interest rate of your mortgage from where it is now. Can you afford to live your life, if interest rates go up by 0.25%? By 0.50%? By 1.00%? If the answer is, you’d be fine, then your decision is a much simpler one. If not, locking in at least a little bit of certainty, could be very valuable to you down the track. Something to ponder anyway.

A fixed rate mortgage is almost like an insurance policy on interest rates going up by more than you can afford. That’s all really. And you’ve just got to work out if you need that insurance or not. Only you can know that.

For now, that’s 5 minutes. Hope it helped. 

Categories: Investing

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