Hi,
I am about to buy a home and need to decide whether to get a fixed, variable or combination loan. I have read many articles on the subject and understand the basics.
i.e.
Fixing protects you from rising rates but denies you savings from falling rates.
If you are borrowing at the limit of what you can afford to repay, fixing gives you essential security.
I can afford to repay the loan even if interest rates rise to over 10% so the main criteria is:
Which type of loan will be cheaper over the next 5 years?
If I could see the future, the answer would be simple. Just do the calculations and pick the option that costs the least. We cannot tell the future so this is not a practical option. I am not happy with the approach that most people take to deal with the uncertainty of future interest rates, namely, to guess the future interest rates and base decisions on this. Is there another way?
For example, has anyone looked at historical data to determine if fixed or variable loans have been cheaper in the past? This would would not give us a definite answer about the future but would at least tell us if there is a higher probability that one will be better.
Another approach could be to look at the mechanism the Banks use to set fixed rates. Some people suggest that fixed rates are based on the predicted future variable rate plus a premium to reduce the lender's risk. If this is true, then variable loans will always prove cheaper except in cases when the Banks miscalculated the expected rates and risk premium. But is this theory true?
I would appreciate any advice that could help me make a decision based on more than just guesses.
Thanks,
Al