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You could look at the other side of things - following on from remembering how high interest rates had been, when I bought my house 20 years ago, I fixed for 5,

You could look at the other side of things - following on from remembering how high interest rates had been, when I bought my house 20 years ago, I fixed for 5, then 10 years and am currently in the middle of a second 10-year fixed rate of around 3.5% - it was previously around 5%. I've been paying 'over the odds' if you look at how interest rates have since turned out, as you mention most people paying around 1.5->1.7% for many years, and so I've often seen myself as 'losing out'. However, I fixed the rate to ensure I had a known amount of expenses that I could afford. Neither is 'stupid' - they just have different volatility and risk.

kypro 4y ago
The mistake I made was dramatically underestimating the volatility. I always understood rates could move up, but if they were going to have trended up to 5% in 10 years then that wouldn't be such a big problem because wages would have moved up by then and I would be able to slowly pay down the mortgage to keep repayments the same. Plus I could also afford 5% rates. The issue with fixes is that you pay a premium for fixing longer term and you also risk interest rates being lower going forward than you fixed for. A lot of the fixes also have early repayment charges and the longer-term fixes can have very large early repayment charges (5%+). This introduces a new risk because if you need to sell your house for some reason during that fixed period you would have to pay a large fee just to exit the deal which isn't great if you've only just brought your house and don't have much equity to fall back on. So given this I was fine with taking something closer to a market price on the assumption that rates wouldn't sky rocket over the course of the next couple of years. That why I'd have the ability to get out of my mortgage if I ever needed to. > Neither is 'stupid' - they just have different volatility and risk. I agree. What upsets me a little is that I don't think I was making a reckless move. We've been thinking about moving away from the city for some time so a longer-term fix was quite risky for us, although if you're sure you're going to stay in your house for 10+ years that's obviously the way to go if you want to reduce the risk of rate rises. I believe in the US there is no early repayment charge on mortgage in which case it probably always makes most sense to take a longer-term fix.
- blibble 4y ago
  > The issue with fixes is that you pay a premium for fixing longer term and you also risk interest rates being lower going forward than you fixed for. this is the essence of the interest rate swap (which is what you're actually buying when you "fix") the person on the other side of the transaction is betting that the rates will rise, and you're betting that they won't > A lot of the fixes also have early repayment charges and the longer-term fixes can have very large early repayment charges (5%+). this is the fee for exiting the swap early, which has to exist otherwise person who bought the other side would never be able to make a profit on it (and hence no-one would ever write one)
  - kypro 4y ago
    Yes, exactly. Fixed rates are basically insurance policies. When rates are rising rapidly like they are to day longer-term fixes seem obvious, almost free money. But the majority of the time they work against you because you're betting against a market that probably knows more than you as a retail mortgage borrower. That's not to say fix deals are always bad, it really just depends on circumstances. There's no free lunch here and those suggesting everyone should be taking 10 year fixes (where they're available) are suffering from recency bias. There's now a huge risk that those taking 10 year fixes will be locked into much higher rates should they come down over the next few years, which is very possible. That's just the UK market though. I believe in the US long-term fix rates make much more sense because you can refinance without incurring fees so if rates do drop you can just refinance.

kypro 4y ago

The mistake I made was dramatically underestimating the volatility. I always understood rates could move up, but if they were going to have trended up to 5% in 10 years then that wouldn't be such a big problem because wages would have moved up by then and I would be able to slowly pay down the mortgage to keep repayments the same. Plus I could also afford 5% rates. The issue with fixes is that you pay a premium for fixing longer term and you also risk interest rates being lower going forward than you fixed for. A lot of the fixes also have early repayment charges and the longer-term fixes can have very large early repayment charges (5%+). This introduces a new risk because if you need to sell your house for some reason during that fixed period you would have to pay a large fee just to exit the deal which isn't great if you've only just brought your house and don't have much equity to fall back on. So given this I was fine with taking something closer to a market price on the assumption that rates wouldn't sky rocket over the course of the next couple of years. That why I'd have the ability to get out of my mortgage if I ever needed to. > Neither is 'stupid' - they just have different volatility and risk. I agree. What upsets me a little is that I don't think I was making a reckless move. We've been thinking about moving away from the city for some time so a longer-term fix was quite risky for us, although if you're sure you're going to stay in your house for 10+ years that's obviously the way to go if you want to reduce the risk of rate rises. I believe in the US there is no early repayment charge on mortgage in which case it probably always makes most sense to take a longer-term fix.

blibble 4y ago
> The issue with fixes is that you pay a premium for fixing longer term and you also risk interest rates being lower going forward than you fixed for. this is the essence of the interest rate swap (which is what you're actually buying when you "fix") the person on the other side of the transaction is betting that the rates will rise, and you're betting that they won't > A lot of the fixes also have early repayment charges and the longer-term fixes can have very large early repayment charges (5%+). this is the fee for exiting the swap early, which has to exist otherwise person who bought the other side would never be able to make a profit on it (and hence no-one would ever write one)
- kypro 4y ago
  Yes, exactly. Fixed rates are basically insurance policies. When rates are rising rapidly like they are to day longer-term fixes seem obvious, almost free money. But the majority of the time they work against you because you're betting against a market that probably knows more than you as a retail mortgage borrower. That's not to say fix deals are always bad, it really just depends on circumstances. There's no free lunch here and those suggesting everyone should be taking 10 year fixes (where they're available) are suffering from recency bias. There's now a huge risk that those taking 10 year fixes will be locked into much higher rates should they come down over the next few years, which is very possible. That's just the UK market though. I believe in the US long-term fix rates make much more sense because you can refinance without incurring fees so if rates do drop you can just refinance.