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Why go fixed rate?

23/06/2010

A fixed rate mortgage works a little bit like an insurance policy against rate rises. Mostly fixed rate mortgages are priced above variable rates. When a borrower chooses a fixed rate mortgage they are effectively paying the bank to take over the interest rate risk. Currently the premium prices for fixed rate mortgages are very low – ie: many fixed rate mortgages are currently priced around the same level as variable rates.

That means the risk to the borrower of being left on a very high fixed rate mortgage if variable rates fall is quite low. All four major banks are expecting interest rates to keep rising over 2010 and 2011. NAB is expecting the official cash rate that is set by the RBA to rise from 4.5 per cent currently to 6 per cent by the end of next year.

Source: The Age



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