Fixed Rates - How do you view them?
"I've got a good fixed rate," are words that make me cringe. So often they indicate, whether it be for a business debt or a personal mortgage, that the borrower is not viewing fixed rates correctly.
Fixed interest rates became more common in personal and business mortgages in the 1990's , and were fuelled by greater competition in the home mortgage market and a desire to provide unique selling points. There were also memory of high interest rates of double figures in the 1980's and early 1990's with resultant repossessions.
When I bought my first house in 1994 I chose an introductory short term fixed rate, not because it was a good deal, but because I recognised it would enable me to get used to a new budget as a home owner. A few tears later, as I got married and planned to start a family I chose a 10 year fixed rate at 5.99%. Again this was not to get a good deal, but to fix a cost. Indeed, three years into the ten year term I saw base rates drop to 3.5%, but I was content with my decision for it had enabled me to fix a cost and plan my finances around that with certainty.
The key benefit of fixed rate borrowing is to fix a cost to enable you to plan your personal or business finances around that. Any other view is highly unhelpful.
However, this does not mean that I do not have some sympathy for those borrowers coming off a fixed rate and looking at massive rises. When a person or a business borrows money a lender stress-tests the borrower against a potential rise of interest rate. This has often been at say 3% or 4% rate rise. With base rate currently being at 5% this means that any debt taken out up to 14 years ago is now at a point where it was originally stress tested to at the time of the original lending decision. However, both businesses and private individuals have seen massive increases in inflation, especially energy bills. We have also seen a prolonged period (with an artificial respite for some during Covid) of suppression of income, especially wages. This means that what was deemed affordable at the time of the original borrowing is now past the stressed point considered reasonable at the time it was taken out due to the combined effects of interest and inflation.
The two question I have been asked the most over the last twelve months are:
"Should I take out another fixed rate?" and "What do you think rates will peak at?"
Of course the answer is, "I don't know." However the borrower should consider the following questions when looking at a fixed rate:
If interest rates and other costs increase at what point is the debt unaffordable?
If I take a fixed rate will it enable me to plan my other finances well enough to build up a cash savings reserve?
Does the fixed rate fit in with my other business or life plans? Especially relevant to this is the term, the length of time the fixed rate is for.
If I do not take a fixed rate is the debt still affordable as rates rise?
Do I have the ability to overpay the fixed rate without penalty? (Fixed rates can incur significant penalties if repaid early, however it is currently an industry norm for you to be able to overpay the debt by 10% per annum - but this should be checked in writing with your lender).
Is the fixed rate transferable to different security? - This is particularly relevant to a personal mortgage where you may wish to move home.
At no point should you be asking yourself is this a cheap deal? As to whether it is a good deal depends on how you view your borrowing.
Finally, I will use a phrase that I constantly repeat to people in order to encourage a healthy outlook to borrowing and money decisions in general: "Money is just the oil that lubricates life's engine."