4.2.2 Interest rates – fixed or variable?

Discussion

Assuming that borrowers have a choice and want to pay as little interest as possible, choosing a fixed rate may be preferred if rates are expected to rise, and a variable rate may be preferred if interest rates are expected to fall.

However, to assess which would be cheaper requires a forecast of how rates will move during the life of the loan, and making such forecasts is difficult because it is difficult to predict future rates of inflation and interest rates. In addition, the choice may reflect the borrower’s household budget. For example, households on a tight budget may choose a fixed rate because this would provide certainty of monthly expenditure.