Fixed rate - the risk

Chris2000

alan44 wrote: »

Tracker ones can be worthwhile though if you feel interest rates are going to fall significantly in the next two years, so you can then fix for the long term.

Except that the market's expectation of future short-term interest rates is already priced into the long-term interest rate swaps that determine the price of long-term fixed rate mortgages. So you would have to believe that short-term interest rates are going to fall more than the market expects them to in order to benefit from this strategy.

At the moment mortgage rates are artificially high because of the credit crunch and there may be some merit in waiting for that to sort itself our before fixing. But it has nothing to do with whether the base rate is likely to go up or down, fixed rate deals already take that into account.

Generali

Chris2000 wrote: »

Except that the market's expectation of future short-term interest rates is already priced into the long-term interest rate swaps that determine the price of long-term fixed rate mortgages. So you would have to believe that short-term interest rates are going to fall more than the market expects them to in order to benefit from this strategy.

At the moment mortgage rates are artificially high because of the credit crunch and there may be some merit in waiting for that to sort itself our before fixing. But it has nothing to do with whether the base rate is likely to go up or down, fixed rate deals already take that into account.

That's not entirely true as you pay a premium to fix interest rates for a long period so the price you pay:

Long fix = market expectation of rates (as priced in the interest rate swap market) + illiquidity premium + risk premium + profit margin

Floating rate = LIBOR + risk premium + profit margin

The risk premium should be lower for a floating rate. The profit margin will be set by what the market will bear.

Over the life of a mortgage you'd expect to pay a little more on a long-term fixed rate than on floating rates but you've reduced your risk as you won't experience any short term hike in what you pay that may cost you your home.

MarkyMarkD

Whilst in theory what you say is correct, Generali, the mortgage market is rather more complex than that.

In particular, the profit margin is not consistent across products because of differing levels of competition - at certain points in time, the intense competition is on fixed rates; at other points in time, the intense competition is on tracker rates. So the argument that fixed will tend to cost a bit more than floating may be true, or equally likely untrue.

Last year, for example, most people wanted fixes. So fixes were more competitive than trackers and less profitable for the lenders, and therefore relatively better value for the borrowers.

Strangely, it's like the opposite of the normal supply/demand situation. More demand = lower price because of increased competition, rather than higher price because the demand exceeds the supply.

poppy10_2

Gorgeous_George wrote: »

I still think that the North East will suffer somewhat less than many areas.

Yes, it's different here :j:rolleyes: