Creating a "fixed for life" mortgage

Housing Market Written by John Bolton, Sep 13 2009

Too many homeowners are preoccupied with mortgage rates when they should be focused on repaying their debt as fast as possible. Here’s how to keep your repayments constant for the life of your mortgage ("fixed for life") but at the same time benefit from low short-term interest rates.

Step one

Put your mortgage over a 30-year term to minimise your contractual mortgage repayments. Split your mortgage and, for example, fix half for 12 months at 5.50% and half for 18 months at 5.90%. Splitting the mortgage simply means it won’t all reprice at once.

Step two

Set up your regular repayments based on a mortgage interest rate of 8.00% and a mortgage term of 25 years. On a $400,000 mortgage that equates to $3,100 per month. Initially that means you will be paying your mortgage off faster than contractually required (minimum repayment would be $2,272.) As mortgage rates increase, you will not need to change your repayment amount. Based on our mortgage rate forecast, your mortgage will be able to accommodate rate increases all the way up to 9.40%. If rates were to go higher than this (which we consider highly unlikely) then you could switch to interest-only for a short period of time to keep your repayments at the same level. Using this approach you know exactly what you repayments will be for the life of the mortgage, no matter what happens to rates - thus giving you certainty.

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