Fix, track, or wait

Contents

• 00:00 — Fixed and tracker, one minute each
• 07:05 — What you are actually paying for with a fix
• 16:20 — What the arrangement fee buys
• 26:40 — Comparing two offers that look identical
• 37:15 — The cost of being wrong, both ways
• 47:30 — When waiting is the answer
• 55:40 — What to do this week

Transcript

Yara Mensah: One minute each, no jargon. Fixed.

Fatima Zahra Benali: Your payment is the same every month for an agreed period. Rates move, yours does not. At the end of the period it stops being fixed and you deal with it then.

Yara Mensah: Tracker.

Fatima Zahra Benali: Your payment follows a published rate. If that rate goes up, your payment goes up, usually the following month. If it goes down, your payment goes down. You are along for the ride in both directions.

Yara Mensah: So the question everybody asks is which one is cheaper.

Fatima Zahra Benali: And I will not answer it, and I want to explain why rather than just refusing. Nobody knows which is cheaper, because the answer depends entirely on what rates do over the next few years, and any person who tells you otherwise is guessing with a confident face.

Yara Mensah: Then what is the question?

Fatima Zahra Benali: What is certainty worth to this household. That is the actual decision. A fix is not a bet on rates — it is a purchase. You are buying a known number, and the price of that number is that it is usually slightly higher at the start than the alternative. Whether that is a good purchase depends on how much room you have.

Yara Mensah: Say more about room.

Fatima Zahra Benali: If the payment went up by a couple of hundred dollars next month, what happens in your house? For some people the answer is: we would notice and be annoyed. For others it is: we could not do it. Those two households should not make the same choice, and the reason is nothing to do with markets.

Yara Mensah: Stay on certainty for a moment. How does somebody work out what it is worth to them? That sounds unanswerable.

Fatima Zahra Benali: It is answerable, it is just not arithmetic. I ask two questions. First: if the payment went up two hundred next month, what would you stop doing? People answer that very fast and very specifically — we would stop the holiday, or we would stop putting anything aside, or we would be in trouble. The specificity is the answer.

Yara Mensah: And the second?

Fatima Zahra Benali: How much do you think about it. Some households genuinely do not mind a moving number; they will look at it once a year and shrug. Others check the rate news, which is a miserable way to own a home. If somebody tells me they have been reading about central banks, I already know which product suits them, and it is not the one that is cheaper this month.

Yara Mensah: That is a psychological answer to a financial question.

Fatima Zahra Benali: It is a financial answer. Anxiety has a cost — it is just not on the illustration. And the person who fixes and sleeps is not being irrational; they have bought something real and they have paid a known price for it.

Yara Mensah: How long a fix, then?

Fatima Zahra Benali: Long enough to cover the period you can actually see. Most people can see two or three years of their own life with some confidence and cannot see five. A longer fix buys more certainty and costs more to leave, so the question is not "how long do I want a good rate" — everybody wants that forever — it is "how far ahead can I promise not to move house".

Yara Mensah: Now the arrangement fee, because I think people treat it as an annoyance rather than as part of the price.

Fatima Zahra Benali: It is part of the price and it is deliberately placed where it will not be compared. Lenders know that people shop on the headline rate, so a very attractive rate can carry a large fee, and a plain rate can carry none. The two offers are then genuinely difficult to rank by looking at them, which is not an accident.

Yara Mensah: How do you fold it in?

Fatima Zahra Benali: Take the fee, divide it by the number of months in the deal, add that to the monthly payment. Now both offers are one number and you can rank them. It is crude — it ignores the fact that a fee added to the loan is itself borrowed — but it is close enough to put two offers in the right order, and doing it badly beats not doing it.

Yara Mensah: Can we do the cost of being wrong? Invented numbers, so nobody thinks these are real.

Fatima Zahra Benali: Invented, yes. Say fixing costs you $40 a month more than the tracker at the start. Over two years, being wrong about that — rates never move — cost you about a thousand dollars, and you knew the figure in advance.

Now the other way. You take the tracker, rates rise, and the payment goes up $250. You did not choose that number, you did not know it was coming, and it lands in a month when other things are also happening.

Yara Mensah: So the two mistakes aren't the same shape.

Fatima Zahra Benali: They are not remotely the same shape, and that is the most useful thing in this episode. One mistake is a known amount you agreed to. The other is an unknown amount that arrives. People compare them as though both were simply "losing money," and they are not comparable at all if your budget has no slack in it.

Yara Mensah: What about the things that are not the rate at all? People compare two offers and only look at the number.

Fatima Zahra Benali: Overpayments are the big one. Most fixed deals let you overpay a percentage of the balance each year without penalty, and that percentage varies. If you are somebody who gets a bonus, or who expects your income to rise, the deal with the more generous allowance can be worth considerably more than a small difference in rate.

Yara Mensah: And nobody compares that.

Fatima Zahra Benali: Almost nobody, because it is on page eleven. The other one is portability — whether you can take the deal with you if you move. If there is a real chance you move inside the fixed period, that clause is the most important thing in the document and it is never in the headline.

Yara Mensah: What does it cost to get out?

Fatima Zahra Benali: An early repayment charge, usually a percentage of the balance that steps down each year of the deal. It is a large number and it is knowable in advance, which makes it one of the few genuinely comparable things between two offers. I would write it on the sheet next to the fee.

Yara Mensah: When is waiting the right answer?

Fatima Zahra Benali: When you are more than a few months from the end of a deal — you cannot usually secure anything that far out, so worrying is unpaid work. And when something in your life is about to change: a move, a baby, a job. Locking into a long fix just before a change you can see coming is how people end up paying to leave it.

Yara Mensah: This week.

Fatima Zahra Benali: One sheet of paper, two offers, fee divided across the months and added in. Most people have never had both offers written down side by side with the fee included, and it takes ten minutes. If the ranking surprises you, that is the fee doing what it was designed to do.