**Reply:** 5.1.1.1.1

**From:** Waverly Bay

I am not entirely satisfied that fixing rates is tantamount to taking out an "insurance policy" to "protect" against the risk of higher future interest expenses.

When an insurance policy is taken out, you are outlaying a fixed premium in return for a financial payout. Also, the maximum loss you will incur under an insurance policy is the premiums outlayed.

So for example, under a car/home/life/contents insurance you are assured a pay out for which your maximum exposure/expenditure is always only the premium paid.

The same can be said for derivatives such as a put option.

However, the "premium" you pay for fixing rates (ie the differential between the prevailing variable and the fix rate) is not your maximum exposure ! If you mistime the fixing of your rate, then your exposure can be more than the premium you pay for having a fix rate position !

The statistics show clearly that a majority of borrowers fix rates at the wrong part of the interest rate cycle - - - - so that on a refinance, they end up with nasty break costs !

Therefore, the position I take is that when you fix rates you are not buying an insurance policy: you are trading the interest rate markets. You are a trader. In trading terms, you are long interest rates. You are BETTING that for the duration of your fixed term, the variable rate will be higher than your fixed rate. In fact, if you are worried about market rates rising, why not call your broker and short bonds? Buying a fixed interest rate position is no different to taking a short position on the bond markets.

And because the "mums and dads" borrowers are not skilled to understand the intricacies of the interest rate markets, their gamble more than often fails - resulting in break costs upon refinance.

My view is simple - and it is my view only of course - - - if you want a real hedge, a real damn good but simple protection against being cleaned out by future interest rate hikes - then monitor and control your gearing levels.

That said - purely from a trading perspective - if you need to fix, if you need to take a "punt" on the future direction of interest rate - then now would be the time for it. Good luck

cheers

Waverly