Help with deciding about a variable/fixed rate mortgage
September 7, 2022 8:16 AM Subscribe
Our initial 3-year fixed-rate loan is up, and now we're unsure if we should lock in a fixed rate again or let it stay variable. Reading online suggests that variable rates are historically cheaper over the long run, so we should go with that, right? (We have a relatively cheap house so could afford a jump in payments if it happens). But it also seems like we're about to get higher and higher interest rates, so we should lock it in now while it's low, right? Both choices seem simultaneously sensible and foolish.
We live in Sweden. We had a 3- year loan at 1.6% interest, and this week it ended and is now a 3-month variable loan at 2.7%. The fixed rates available are roughly 4% for three years and 4.3% for ten years. We live in a small rural town and the house was cheap, so we could theoretically afford a >10% interest rate if it came to it. And over the long run variable is historically cheaper, so that's the right choice, I guess?
But it also seems like we're about to have higher interest rates, so it seems like the right time to lock it in to something relatively cheap, if indeed it will jump up a fair bit over the next few years.
We owe the equivalent of $65,000 on the house. We have about $30,000 in savings so if it came to it we could pay down the house quite a bit if the interest rates shot up.
It seems like there are a lot of different things to consider. Any tips are welcome!
We live in Sweden. We had a 3- year loan at 1.6% interest, and this week it ended and is now a 3-month variable loan at 2.7%. The fixed rates available are roughly 4% for three years and 4.3% for ten years. We live in a small rural town and the house was cheap, so we could theoretically afford a >10% interest rate if it came to it. And over the long run variable is historically cheaper, so that's the right choice, I guess?
But it also seems like we're about to have higher interest rates, so it seems like the right time to lock it in to something relatively cheap, if indeed it will jump up a fair bit over the next few years.
We owe the equivalent of $65,000 on the house. We have about $30,000 in savings so if it came to it we could pay down the house quite a bit if the interest rates shot up.
It seems like there are a lot of different things to consider. Any tips are welcome!
I have two mortgage terms. The first one was under variable, which I lost the bet. Interest rates rose until covid started and then decreased. But I wasn't happy having additional home payments that ate at our disposable income. In 2020, I picked a fixed rate mortgage after my first term was up. I have won the bet as interest rates are shooting up to control inflation and I have a measure of predictability that doesn't freak me out. I don't think I would return to variable rate mortgages as I like consistency in life.
posted by DetriusXii at 8:41 AM on September 7, 2022 [1 favorite]
posted by DetriusXii at 8:41 AM on September 7, 2022 [1 favorite]
The variable loan adjusts every 3 months and is currently 2.7%? I'd take the 10 years at 4.3%. If the variable loan adjusts every year or longer, then the variable would be better.
posted by The_Vegetables at 8:47 AM on September 7, 2022
posted by The_Vegetables at 8:47 AM on September 7, 2022
I have a fixed mortgage because I like the guaranteed rate (consistency), it'll get cheaper over time (inflation), and because at least in my region the variable-rate loans had a very high maximum rate and no limit about how much the rate could change at once. E.g. it could have jumped from 5% to 10% in the next payment period!!
I'd carefully review the details of your variable-rate loan to see what kind of risks you are signing up for. It sounds like you're in a good position to handle any surprises so it may be worth the gamble to keep the variable-rate loan.
posted by jpeacock at 8:49 AM on September 7, 2022 [3 favorites]
I'd carefully review the details of your variable-rate loan to see what kind of risks you are signing up for. It sounds like you're in a good position to handle any surprises so it may be worth the gamble to keep the variable-rate loan.
posted by jpeacock at 8:49 AM on September 7, 2022 [3 favorites]
Best answer: Reading online suggests that variable rates are historically cheaper over the long run
I am not in Sweden, and I am not familiar with fixed/variable mortgage spread in Sweden (that's the difference in interest between the two options). This answer is sort of a "generic whole-world" answer.
This statement is true - but somewhat lacking context. Over the last 40 years, across the entire world, interest rates have been dropping. For a person with a loan, this has incentivized that person to maintain variable rates rather than fixed rates. You will see this referred to in finance circles as the "40 year bond bull run" - a time when interest rates nearly continually decreased, which benefits people who lend out money at fixed rates, or people who borrow money at variable rates.
It is challenging (although not impossible) for interest rates to decrease indefinitely. Interest rates for lending between banks went from 20% interest rates in the 70s down to 10% in the 80s, to 5%-7% in the 90s, then quickly down to 0% in the late 2000s due to the Great Financial Crisis. Even now, with many people talking about high interest rates, lending rates are historically low and are still lower than the early 2000s. Negative interest rates start to get very weird (being paid to borrow money), and the countries that have ended up with negative interest rates have generally done so only due to significant economic issues. Most countries see negative interest rates as an indication their country's economy has failed, and hence, are highly averse to going too far in decreasing interest rates.
This is a long-winded way of saying that historical evidence here is not necessarily all that meaningful. By historical evidence, current interest rates - even now - are incredibly low. I'm more comfortable believing that historical evidence will indicate that interest rates will rise more than they fall. That favors a fixed rate mortgage rather than variable rate, in general.
posted by saeculorum at 8:50 AM on September 7, 2022 [11 favorites]
I am not in Sweden, and I am not familiar with fixed/variable mortgage spread in Sweden (that's the difference in interest between the two options). This answer is sort of a "generic whole-world" answer.
This statement is true - but somewhat lacking context. Over the last 40 years, across the entire world, interest rates have been dropping. For a person with a loan, this has incentivized that person to maintain variable rates rather than fixed rates. You will see this referred to in finance circles as the "40 year bond bull run" - a time when interest rates nearly continually decreased, which benefits people who lend out money at fixed rates, or people who borrow money at variable rates.
It is challenging (although not impossible) for interest rates to decrease indefinitely. Interest rates for lending between banks went from 20% interest rates in the 70s down to 10% in the 80s, to 5%-7% in the 90s, then quickly down to 0% in the late 2000s due to the Great Financial Crisis. Even now, with many people talking about high interest rates, lending rates are historically low and are still lower than the early 2000s. Negative interest rates start to get very weird (being paid to borrow money), and the countries that have ended up with negative interest rates have generally done so only due to significant economic issues. Most countries see negative interest rates as an indication their country's economy has failed, and hence, are highly averse to going too far in decreasing interest rates.
This is a long-winded way of saying that historical evidence here is not necessarily all that meaningful. By historical evidence, current interest rates - even now - are incredibly low. I'm more comfortable believing that historical evidence will indicate that interest rates will rise more than they fall. That favors a fixed rate mortgage rather than variable rate, in general.
posted by saeculorum at 8:50 AM on September 7, 2022 [11 favorites]
Speaking as a person currently being eaten alive by a variable-rate mortgage...I still think you might consider getting a variable rate. If you think interest rates are going up, get a very short term one -- 1-2 years, and then get a new one after rates go up. I don't know if it's the same in Sweden, but my mortgage broker told me that when rates are higher you get a better rate relative to prime: So for example, when rates are low you might get .5% below prime, but when rates are higher you can get 1% below prime. So ideally put yourself in a situation where you're getting your variable rate when rates are high. Then when rates drop again, you're extra golden. If rates continue to go up at that point, you've still won because you've had a year of paying the lower rate.
posted by If only I had a penguin... at 9:59 AM on September 7, 2022 [1 favorite]
posted by If only I had a penguin... at 9:59 AM on September 7, 2022 [1 favorite]
One question is how easy is it to refinance your mortgage if rates drop significantly in the future? I bought my first house with a 12% mortgage and was delighted to refinance at 10.75% a few years later. So, I have lived experience of times with high inflation and high mortgage rates. If you are able to refinance with reasonable fees then I would take the fixed rate mortgage - a big win if rates go up and only slightly behind a variable rate if interest stays level or drops.
posted by metahawk at 10:12 AM on September 7, 2022
posted by metahawk at 10:12 AM on September 7, 2022
saeculorum states the gambit well.
Picture a future in which, yes you can get a variable at a half point above prime, but prime is close to 20%. You may wish you'd locked in a rate a year or more in the past.
What's the cap on your variable? How long must it take to get there?
If you'd locked your rate now, how much space between a variable and locked would you have? Because if you go for a new, locked rate at that point it'll be because you didn't foresee the interest rates increasing so much so soon. It'll hurt more then than locking today.
But if you believe that 5%-ish is as high as interest will go, then you're fine going variable.
If you believe we're living in a historic low, take advantage of it.
I am not a fortuneteller.
I am not your fortuneteller.
I am not Swedish.
I did just refi for a 30 year fixed for a historically low percentage rate, and took a decent amount of equity out, after six years on a variable. Our new fixed monthly payment will be less than continuing the variable before the end of this calendar year (USA, west coast)
posted by lothar at 10:41 AM on September 7, 2022
Picture a future in which, yes you can get a variable at a half point above prime, but prime is close to 20%. You may wish you'd locked in a rate a year or more in the past.
What's the cap on your variable? How long must it take to get there?
If you'd locked your rate now, how much space between a variable and locked would you have? Because if you go for a new, locked rate at that point it'll be because you didn't foresee the interest rates increasing so much so soon. It'll hurt more then than locking today.
But if you believe that 5%-ish is as high as interest will go, then you're fine going variable.
If you believe we're living in a historic low, take advantage of it.
I am not a fortuneteller.
I am not your fortuneteller.
I am not Swedish.
I did just refi for a 30 year fixed for a historically low percentage rate, and took a decent amount of equity out, after six years on a variable. Our new fixed monthly payment will be less than continuing the variable before the end of this calendar year (USA, west coast)
posted by lothar at 10:41 AM on September 7, 2022
I always have gone for fixed rates, and then made additional payments on the principal (my mortgage allowed up to 10% without penalty) as the "variation."
This suits my personality because my base housing costs are relatively fixed and I can budget around them for not just whatever is going on but for all my various disaster plans (what if we're both unemployed! What if we're both disabled from Covid!)
Also, for me, it's always seemed like everything goes up together except salary, which trails -- if interest rates rise, energy costs and taxes and maintenance costs and the price of a fridge if ours breaks are also rising, so keeping the mortgage fixed has for me emotionally meant there was one not-moving-target.
We're now free and clear. (Kinda, I bought new windows that are currently financed separately.)
posted by warriorqueen at 10:52 AM on September 7, 2022 [2 favorites]
This suits my personality because my base housing costs are relatively fixed and I can budget around them for not just whatever is going on but for all my various disaster plans (what if we're both unemployed! What if we're both disabled from Covid!)
Also, for me, it's always seemed like everything goes up together except salary, which trails -- if interest rates rise, energy costs and taxes and maintenance costs and the price of a fridge if ours breaks are also rising, so keeping the mortgage fixed has for me emotionally meant there was one not-moving-target.
We're now free and clear. (Kinda, I bought new windows that are currently financed separately.)
posted by warriorqueen at 10:52 AM on September 7, 2022 [2 favorites]
Fixed rate is the safer way to go and you can always refinance if rates improve.
posted by jeszac at 11:14 AM on September 7, 2022
posted by jeszac at 11:14 AM on September 7, 2022
This is a long-winded way of saying that historical evidence here is not necessarily all that meaningful. By historical evidence, current interest rates - even now - are incredibly low. I'm more comfortable believing that historical evidence will indicate that interest rates will rise more than they fall. That favors a fixed rate mortgage rather than variable rate, in general.
It think it's also true that even if you are wrong and interest rates drop further, the benefit you'll see from that gets smaller and smaller. Switching from 10% to 5% makes a huge difference in the total dollar amount you pay in interest. 5% to 2.5% makes a difference, but nowhere near as big.
If you get a fixed rate at today's historically-low interest rates and rates drop, you probably aren't missing that much.
posted by It's Never Lurgi at 11:20 AM on September 7, 2022
It think it's also true that even if you are wrong and interest rates drop further, the benefit you'll see from that gets smaller and smaller. Switching from 10% to 5% makes a huge difference in the total dollar amount you pay in interest. 5% to 2.5% makes a difference, but nowhere near as big.
If you get a fixed rate at today's historically-low interest rates and rates drop, you probably aren't missing that much.
posted by It's Never Lurgi at 11:20 AM on September 7, 2022
If you get a fixed rate at today's historically-low interest rates and rates drop, you probably aren't missing that much.
This. While rates have gone up a bit, they are still very low. There's very little room for the needle to move any lower, and a whole lot of room for it to go higher. Make extra payments on the principal if you can.
We paid ours off a couple years ago, even though our rate was just under 3%. A lot of financial folks told us we were crazy to pay it off instead of putting that money into something financially productive, and just carrying that low-interest debt. But, OTOH, the house is ours free and clear now, nothing can change that, and by aggressively making extra payments, we saved almost $300k in interest. So, there is that. Sure, on paper, with the right investments we probably could have squeaked out $X more in earnings vs. even all that extra interest, but we also very much like the security of not having that hanging over us any more. We paid off mid 2020, right in the thick of COVID, and holy shit was it a relief to not have a mortgage to worry about, with (gestures at world) going on.
posted by xedrik at 12:37 PM on September 7, 2022 [1 favorite]
This. While rates have gone up a bit, they are still very low. There's very little room for the needle to move any lower, and a whole lot of room for it to go higher. Make extra payments on the principal if you can.
We paid ours off a couple years ago, even though our rate was just under 3%. A lot of financial folks told us we were crazy to pay it off instead of putting that money into something financially productive, and just carrying that low-interest debt. But, OTOH, the house is ours free and clear now, nothing can change that, and by aggressively making extra payments, we saved almost $300k in interest. So, there is that. Sure, on paper, with the right investments we probably could have squeaked out $X more in earnings vs. even all that extra interest, but we also very much like the security of not having that hanging over us any more. We paid off mid 2020, right in the thick of COVID, and holy shit was it a relief to not have a mortgage to worry about, with (gestures at world) going on.
posted by xedrik at 12:37 PM on September 7, 2022 [1 favorite]
I am of the view that interest rates are historically low, and do not look likely to go lower over the next say 3 years. On top of which they cannot really get substantially lower (the floor is just about 0%) whereas they can get very significantly higher. I would fix. I would also then not bother looking at what interest rates were actually doing until I next needed to get a mortgage deal.
posted by plonkee at 4:06 PM on September 7, 2022
posted by plonkee at 4:06 PM on September 7, 2022
Do you have the option of doing part fixed, part variable? With an offset account to offset the variable portion?
posted by kinddieserzeit at 7:07 PM on September 7, 2022
posted by kinddieserzeit at 7:07 PM on September 7, 2022
This thread is closed to new comments.
When looking at mortgages during a period of relatively low but not rock-bottom interest rates, I knew I'd feel more secure if I locked in a rate rather than going with a variable rate that could go up. So I'm a fixed-rate person.
Alternatively, if the idea of potentially leaving money on the table is more stressful for you, you may emotionally lean towards a variable rate.
Keep the emotional aspect in the discussion as well as the financial aspect.
posted by craven_morhead at 8:34 AM on September 7, 2022 [1 favorite]