Just got this analysis from a Margaret Lomas' newsletter...Not a bad way to look at it.

In my books, it's the Banks who want you locked in, (knowing u wont break, cos the costs are so high). They keep their customer for the period, that's their main reason for dangling the carrot.

Cheers,

JB

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Let's consider a $200,000 loan, with a current interest rate of 6%. We will assume that the standard variable rate is 6.7%, and that this rate is a discounted rate, since these days most borrowers can access a discount of around 0.7%.

In the main a fixed rate will be around .7% higher than the variable, which means it will also be around 1.4% higher than any discounted rate you may be able to access. On a $200,000 loan, this means that $233 more in interest is paid each month.

Imagine that you take a fixed rate for 2 years. During that time, there is a rate rise every three months of .25%, meaning that a total of 1.75% (first 3 months at 6% then a rise each three months) in the 2 year period is added to the variable rate (and your discounted rate).

Total interest on the variable rate loan of $200,000, given the increases, is $27,495. After tax breaks of 30%, the investor pays a net of $19,246. During that time, even after 5 rises, the rate on this loan was still less than the available fixed rate. For 6 months it was more. Total interest paid on the fixed rate loan is $29,600, or $20,720 after tax breaks.

In order to make fixing worthwhile you would need to see a rate rise of more than 2.5% more than the current variable for at least half of the period in which you are taking out the fixed rate. So, for the example above over a two year period, the variable would have to be higher than 7.4% for at least 12 months to make this strategy pay off.

It's always worthwhile doing your sums first rather than simply acting on a whim. I am not expecting a rate hike of any more than 2.5% in the coming 2 years and so fixing is a gamble to take.

If, on the other hand, you feel better when you have some assurance, by all means fix, and see the extra you may pay as insurance for you

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