Fixed versus variable mortgage rates: how do you work out which one you should choose?

“I know what you’re thinking. Did he fire six shots, or only five … you’ve got to ask yourself one question: ‘Do you feel lucky?’ Well, do ya punk?”

Thank you Dirty Harry. Interest rates are that 44 Magnum and getting the fixed rates equation wrong could “blow your head clean off” in a financial sense.

Fixed rate mortgages can be two things – an insurance policy and/or a potential money-making punt.

Over an interest rates cycle, variable rates tend to be cheaper. The downside is that they can, obviously, vary considerably over the years.

Fixed interest rates give you certainty. You know what your repayments will be. However, there is generally an extra “cost” for this “insurance”.

The problem, my mortgage mates, is that we tend to lock in when we’re panicked and not thinking rationally. The “dumb time” to lock in is when interest rates are at, or close to, their peak. That is, they’ve been rising for a while and you’re scared they’ll rise much further.

Too often, when the throngs start fixing at high rates, the Reserve Bank starts cutting. But you’re now locked in at a silly rate for years.

So, when is the “right” time for fixed rates? When rates have been falling for a while.

That’s pretty much where interest rates are right now. Check out infochoice.com.au and you’ll find dozens of banks offering two and three-year fixed rates for between 5.5 and 6 per cent.

That’s certainly not a recommendation to lock in, but it beats fixing, as many did, in early 2008, when interest rates were peaking.

Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and principal adviser with Castellan Financial Consulting.