What is happening with fixed rates?

We have been asked a few times about fixed mortgage rates and why they are lower than standard variable rates at the moment.

This has been going on for a few months in the mortgage market and the reason is fairly simple, lending rates are going to drop over time.

The one year fixed rate has traditionally been one that is used to attract business to a bank or building society. They are often a loss leading rate and after availing of it the person goes onto a higher rate or another fixed rate so we have to strip them out.

But from the 2yr rate onwards you normally paid a premium over and above the standard variable rate. So what is happening?

Lower fixed rates mean that banks are going to capture a margin that is likely to decline in the near future. The Euro yield curve is below.

2015-03-25 yield curve What you see is that it is negative (below zero) for many years into the future, in fact, it’s only hitting zero at 5 years and 10 months into the future.

This spells lower returns all round.

Variable rates are high(er) now, but will fall as competition for the existing pool of lending heats up, part of lending expansion is about taking business from your competitors.

And then you have the lower future expectation and that aforesaid competition will be part of what also lowers rates.

For this reason taking a one year fixed, availing of the lowest rate and then (if things work out as per expectations) coming off it you have a choice of going on to another fixed rate that is still likely to be low, or the variable which may have caught up by then.

What you want to do is have the lowest cash outlay possible given credit is a uniform product, there is no ‘better mortgage’ in terms of the function of credit, only better prices.

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