Ask Paul: Should we refix our mortgage?

Dear Paul,

My wife and I have $940,000 left owing on our house, worth about $1.3 million. Half our mortgage is variable, half is currently fixed at 2.2%, but the fixed period ends in November.

Should we refix half or all of the mortgage? Or leave it all on variable? 

We can afford maybe one or two small rate increases, but there's not too much fat left in the budget given all our bills are going up. - Jerry

Damn, another hard question. I've barely recovered from answering Bryan.

Here we have some pretty hard facts. Regardless of whether you fix or not in November, when 50% of your mortgage comes off 2.2%, you are going to hit a cash crunch. In this highly volatile world, interest rate predictions are a pretty silly game.

Predictions certainly get much coverage in the media, but in terms of accuracy, you may as well put a bunch of interest rate numbers on a dartboard and base your "interest rate guess" by throwing a dart - whichever number you hit is it!

One thing we can clearly say is that interest rates are having a major impact on borrowers. That bit is easy.

Any future hikes, in particular with many property owners coming off fixed and onto variable rates, are going to hit hard. Small business is also doing it tough and the recent round of profit reports from non-resources companies were not that great.

This makes it hard to disagree with experts who feel there are not many rate rises to come. In your case, with $470,000 coming off 2.2% and going onto something like 5.75%, it means a big hit to your budget.

Presumably your 2.2% is interest only, so that's about $10,000 a year. At 5.75% variable over 25 years, it comes pretty close to $30,000.

With hindsight, which is the only reliable way to be right about money issues, fixing was a good call. Generally, though, I've felt more comfortable with the lowest variable rate possible and at times of low rates look to make a big dent in the loan.

Fixing makes sense if it gives you an affordable repayment amount. If rates go up, you relax. If they go down, you will be cranky, but you can afford the repayments and can keep your home. This is a very sound principle.

We're not guessing interest rates, we're making a decision based on your capacity to repay the loan.

You have until November, and one thing I am pretty certain of is uncertainty.

Personally, I'd be reviewing the situation as we get closer to that date, but my guiding principle regarding fixed or variable would be as I have just outlined. Minimising the risk of losing your home is the key. Let that guide your decision.

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