Martin Hawes: Extra paid on fixed rate is the price of certainty

For most of the past 15 years or so, fixing your mortgage interest rate has been a "no brainer". Fixed rates were such a good deal that you simply put as much as you could on a two or three-year term.

However, the days of fixed rates being a lot cheaper than floating rates are gone - perhaps for a very long time. Most people see this as meaning that they should stick with a floating rate.

It is not a foregone conclusion that we will see major interest rate rises next year. It is most likely rates will rise but there is some chance that the economy will dip again.

There are many economic imbalances around the world that still need to be fixed and it just might be that tough times are not yet over. This also suggests it is preferable to keep your mortgage on a floating rate.

Well, no - not in my book. It is far too early to read the last rites for fixed rates. Instead we need to re-think why we use fixed-rate mortgages and see them in a different light.

It is important to think of fixed rates as an insurance policy rather than an opportunity to save a lot of money. Too many people are focused on picking the best rate and do not think through the risks they have. Property, whether your own home or an investment, is a long-term asset.

This means you should match it with a long-term liability (ie mortgage). Moreover, for most people, income is relatively fixed and therefore your interest rate should also match that fixed income.

Few of us can tolerate a major upward hike in interest rates. Most of us have tight budgets with not a lot to spare after the mortgage and everything else is paid. If that describes your position, a fixed rate provides insurance - it is going for safety when there is a risk you may not be able to pay.

Thinking of fixed rates as an insurance policy helps when there is a cost of fixing - ie, when rates do not rise. At times like this people get grumpy and curse their "luck" they did not stay with a floating rate.

However, as with any insurance policy you should expect a cost and bear it happily: for example, you do not insure your car and and then complain because you do not crash it.

The extra interest you may pay for a fixed-interest rate is a price for certainty. For many of us, such certainty and risk reduction is a price worth paying.

* Martin Hawes is a financial adviser. His disclosure statement can be found at www.martinhawes.com