To Fix or Not to Fix

I have a relatively small mortgage of €75k over 20 years which works out at €455 after mortgage allowance. I'm currently on a variable mortgage and regularly pay twice the required amount of €455. I'm considering fixing my mortgage for about 3 years but know that I will no longer be able to pay extra into the mortgage account. Should I:

1. Continue on variable mortgage knowing rates will increase but have the freedom to pay extra when I wish
2. Reduce the remaining years (so I'll pay more per month) on the mortgage and then fix for 3 years
3. Fix rates for 3 years at the current repayment of €455

I want to make the most of the mortgage tax allowance and therefore am reluctant to clear my mortgage too quickly. It may be better to invest this extra money instead of paying off the mortgage earlier.

My opinion on this is that the banks know more about what interest rates will do than the rest of us, or at least they should. Since they will hedge their risk when setting their fixed rate rates you will probably end up paying more on a fixed rate than you would if you stayed on a variable rate. There will always be an element of risk so if you cannot afford to pay your mortgage if rates go higher than expected (which doesn't seem to be the case with you), then you should fix. Otherwise you should stay variable.
I would also not increase my repayments/ reduce my term if I was you. You can still throw in the odd lump sum as things are and keep your options open for other investments (like a pension). It’s harder to advise on this as your other financial circumstances come into play here. I know from other posters that have cleared their mortgage early that they feel a great sense of freedom having done so.

I have no financial training so this is just my opinion.

What's the basis for your decision to fix?

The main rationale for fixing is generally security or peace of mind, i.e. you know exaclty what you will pay every month. This doesn't really seem to be an issue for you, as you are paying twice what is required in some months. In fairness, nobody knows for sure that rates will increase, or more importantly, when they will increase, so trying to anticipate both is a bit of a gamble.

Look at at it this way-if you fixed your repayments, what would you use the excess cash to invest in over the next three years? Can you be certain that you will earn as much from investing/saving as you would from savings by repaying extra on your mortgage?

One more thing-are you on a 'low' rate? Your mortgage and term are such that I would expect that you could get a a tracker rate of less than 3%. Check out the best buys.

There are loads of existing threads on the whole "fixed versus variable" and "when to fix" etc. issues that you should be able to find using the search facility on AAM and which might be worth a read.

The only basis I have to fix is the 'talk' at the moment in papers, etc. that rates will increase next year overall by 0.5%. I'm currently on a variable rate of 3.25%. I could fix for 3 years at 3.45%

The talk months ago was that it was a good time to fix then and fixed rates have fallen a couple of times more since!! Don't expect to get reliable financial advice by reading the paper or the financial institution press releases that they often regurgitate. Don't bother fixing in an attempt to second guess the institutions, time the market and save money - only do so if you are struggling to meet the repayments (or would do if rates rose by a few percent) and need the predictability that fixed repayments give you. If you can comfortably afford the variable repayments now and if rates rose then stick with a competitive tracker/variable rate as the best way to save on interest csots long term.

ClubMan said:

Don't expect to get reliable financial advice by reading the paper or the financial institution press releases that they often regurgitate.

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The "great and good" Bill Tyson was on about this in the Indo again recently (free registration required). But even UB's Pat McArdle admitted it was still a close call: "I would see fixed rates as an insurance policy; when you buy insurance you pay a premium..."

Personally, I'm sticking with my 2.79% NIB tracker.

Kevin said:

The only basis I have to fix is the 'talk' at the moment in papers, etc. that rates will increase next year overall by 0.5%. I'm currently on a variable rate of 3.25%. I could fix for 3 years at 3.45%

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Kevin

We are paying 3.1% (U-First Tracker) on a much higher loan, LTV and term. I'd sooner switch lenders than interest rate options if I was in your position. As Dr. M has pointed out, he's on 2.79% from NIB. Even if rates did go up by 0.5%, he's still only paying 3.29%

Kevin said:

The only basis I have to fix is the 'talk' at the moment in papers, etc. that rates will increase next year overall by 0.5%. I'm currently on a variable rate of 3.25%. I could fix for 3 years at 3.45%

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Kevin before doing anything get your variable rate down from 3.25 I was offered that by AIB and I called them up and said I was moving if they didnt get me down from it, they came back twice with two different rates I took there second as they insisted they couldnt go any lower I had no other method to convince them so I took 3.1% tracker from AIB. So you should get closer to 3% in my mind if you ask.