Mortgage Rates: Lock In or Go Variable

As the central banks have pumped money into the global system, banks have been able to borrow at cheaper rates. This has also been reflected in lower costs of borrowing for new borrowers and those in floating rate loans or mortgages. As the banks move out of the financial crisis they were mired in just months ago to more surer footing, competition should put downward pressure on the banks lending rates, lowering the cost of borrowing, as long as their cost of borrowing remains low.

The question you need to ask yourself is how long is this going to last? Eventually rates will move up. They have been lower than historical averages for sometime and as the expected economic recovery materializes, rates will start to move up.

On top of this will be the future effects of all the liquidity the central banks are advancing. One concern is that the actions we are taking today to restart the economy are going to lay the seeds for it's future stall out. This scenario sees inflation advancing as spending comes back in a big way. After deferring spending through the past year or two, consumers and businesses could unleash a torrent of new purchases that end up driving prices up. Think about it. All those people that delayed new car purchases have to sooner or later go back to the dealership. The same with businesses that were afraid to spend their cash when business was soft. With prospects improving lots of spending could quickly happen. This will be great news for stocks, but only for the short run. They will soon see that their costs increase just as quickly. All those plant closures that have happened over the last few months will mean that producers cannot ramp up supply as quickly as demand increases. The result will be increases in prices. If there is one thing the central banks hate almost as bad as negative economic growth, it's inflationary price increases. To halt this they will raise rates, possibly very quickly. It will be at this point that those on variable rate borrowing will see interest payments start to rise and rise both quickly and substantially.

Since you are the one paying the cost of your borrowing. You should consider the possible risks you are exposed to if this scenario were to take place. The alternative is to lock in your rate and move into a fixed rate mortgage. You would be looking paying a premium over variable rates but the future changes in interest rates may make this a prudent option for you to consider. I suggest you keep your eye on rates and watch for changes to the variable/fixed spread. If you find that the extra cost of locking in is acceptable you may want to give serious thought to eliminating your future interest rate risk.