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Comment by anon84598 | Hacker News Reader

It's worth noting that most Australian mortgages use variable (i.e., non-fixed) interest rates, so when rates go up, everyone's payment increases. High interest rates in the US are beneficial to mortgage holders because most people use fixed-rate loans which means as inflation increases, your monthly payment decreases in real value.

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No such thing as fixed rate: fixed rate just means "variable, but in 3 or 5 year (or whatever) increments". The interest is a bar graph with bars that are several years wide, instead of a graph with one-month-wide bars.

Fixed rates are not free; you pay extra for the fixing. The longer the fixing, the more you pay.

It only makes sense to go fixed rate if you're very sure that the interest will climb over the next term. Not only that, that it will climb sufficiently enough to offset the cost of locking into the fixed rate so you still come out ahead. Once that term is up, you're no longer locked in; so you have to re-evaluate everything at the start of the next term.

(You don't have to do this upfront, either; variable rate mortgages have the option to switch to fixed for the remainder of the term.)

Anyway, people who go for fixed rate mortgages end up paying tens of thousands of dollars extra over the life of a mortgage, unless they are somehow able to game things in periods of rising interest.

When I was signing up for a mortgage, the financial institution offered to cover the lawyer's fees for all the paperwork, running into the hundreds of dollars. That offer was quickly rescinded when it became apparent that I'm declining the fixed term mortgage and opting for variable. That's obviously because the fixed term is good for them; that's why they incentivized it. When some aspect of a deal is good for you, it's never incentivized.

From another comment below:

In the US, fixed rates are for a 30 year term. Countries like Canada and Australia have 10 year terms as a max, with most people electing for something shorter as the rate goes down.

You can get fixed rates on shorter mortgages in the US. I have been quoted fixed rates on 15 and 20 year mortgages in the past month.

> It only makes sense to go fixed rate if you're very sure that the interest will climb over the next term.

That's not true. I chose to pay an extra £30 a month on my mortgage because I'm not sure rates won't rise over 5 years, and I want to be confident of budgeting for the the next 5 years. I'm confident rates won't go down, but rates going up could affect me. Think of it as insurance. I don't take home insurance because I'm confident my house will burn down, I take it incase my house does burn down

Do you apply the same reasoning for the last payment of the fixed-rate term? £30 because you're not sure that the rate won't rise over the last month and end up costing you £60; good insurance?

I think fixed rate can make sense in some circumstances, but you need to factor in the expectation of eventually refinancing. But then frankly you should expect to refinance anyway. It's highly unlikely that the same mortgage will turn out to be just a suitable to your circumstances and the competitive landscape in 20 years time as it is now, or even in 10 years, whatever mortgage you choose.

Here's my (partial) heuristic. If you see adverts on TV for fixed rate mortgages, don't get one.

You don't have to go for all-fixed or all-variable: you can typically split your loan and fix part of it. This effectively lets you hedge against the interest rate risk - you aren't as exposed to rising interest rates, but also don't benefit as much from falling rates.

The main downside of fixed loans is that you usually can't reduce your interest payments by making additional repayments (because ultimately they are backed by long-term bonds issued by the bank).

Depends on where you live. California state law requires all lenders to except early payments, so a fixed loan holder in California really gets the best of both worlds.

If the interest rate goes down, you can just refinance. The fixed rate protects you from upward movement, and being able to refinance protects you from downward movement. What am I missing?

Only that: TANSTAAFL.

Also: variable mortgages can also convert to fixed. If the rate is sitting flat, you're better off variable, with the option to switch to fixed if it looks like it will climb, than vice versa.

There are fees and process time to refinancing that acts as a disincentive to do so; and for several decades the fixed rate (by design) has been higher than what the variable rate incurs over the term (at least in Canada, where the term and the amortization period aren't the same).

> No such thing as fixed rate: fixed rate just means "variable, but in 3 or 5 year (or whatever) increments".

No, you can get mortgages they are fixed for the life of the loan.

> Fixed rates are not free; you pay extra for the fixing.

You do typically start with a higher rate, but when we shopped for loans last, the variable rate loans all had a floor very near the initial rate and interest rates were at historic lows, so either the momentary extreme lows would last indefinitely or fixed rate would be cheaper over the life of the loan.

Further, if interest rates do drop, you can refinance a fixed rate loan down, minimizing the difference between it and a variable rate, even if the latter doesn't have a floor that prevents meaningful reductions, where variable would be best. OTOH, where fixed would be best (with rising rates), variable leaves you high and dry.

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