For many of us, in a rising interest rate environment our minds jump to one question in particular: should I fix my mortgage rate?
Firstly, let’s consider how fixed rates are calculated by lenders:
variable rates
Variable rates are linked to the lender’s funding costs – as these costs increase, so too will the variable rate.
Fixed Rates
Fixed rates are based on financial market expectations. Lenders use this to forecast their funding costs over a fixed rate period.
A good way to compare fixed rates and variable rates is the concept of a ‘fair value’ fixed rate. There are a number of assumptions that go into calculating a ‘fair value’ fixed rate, including market expectation of future interest rates. While an indicator of the current context, it’s important to keep in mind that these expectations fluctuate and are vulnerable to local and global factors.
When it comes to fixed rates, ‘timing the market’ is a flawed concept – you can only make your decisions based on the context your are in at that point in time. Deciding to fix should be based on a number of factors, including your need for certainty, rather than trying to outrun rising interest rates. And there is always the option of splitting your mortgage to hedge your exposure to rate fluctuations.
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