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Re-fixing Your Interest Rate: Should You Wait?

So you have a mortgage account about to mature and are looking at re-fixing your interest rate. Given that rates seem to be just getting lower and lower, you may be wondering whether it is best to sit with a floating rate and wait for things to get even lower, perhaps even down to a rate with a 1 in the front.

This article will require the use of a crystal ball and some tarot cards. Even though we are using those highly reliable tools you will still need to take everything with a bucket of salt. Case in point: prior to March 2020 most economists and industry experts were forecasting that New Zealand had pretty much reached the lowest point for interest rates and would soon see them stagnate or increase. Then Covid-19 hit. Those crystal balls hadn’t said anything about how you’d need to stock up on sweatpants, toilet paper and flour, or that as a result of government intervention you’d now be looking at re-fixing for a year with interest rates in the low 2%.

What’s happening in the market?

Having written that very long disclaimer, we can look into the future with a reasonable amount of certainty:

  • We know that the housing market is running hot. There’s not much stock, a lot of FOMO and no real solution to this imbalance in the near future. 
  • Covid-19 has been successfully stopped from entering the community and New Zealanders have proven they are willing and able to do what is needed to keep Covid-19 out.
  • The Reserve bank increased LVR restrictions on investment properties to 60% from 1 May 2021. The Government doubled the brightline test and removed tax deductible interest.
  • The Reserve Bank has (thankfully) other tools in the tool bag to cool the market before they resort to increasing interest rates. 
  • Although interest rates are currently incredibly low, the banks are calculating affordability using an interest rate of around 6%. Principal repayments must be calculated for as well as interest payments. While this may be frustrating for some buyers who could afford a lot more debt at today’s low interest rates, it will save many people’s homes if and when the interest rates go back up.

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What’s happening with interest rates?

Floating rates have remained steady (around 4.19%) since the end of last year. Shorter fixed term rates of 6 months to 2 years have continued a downward trajectory since May 2020. However, interest on fixed terms of 3 years or more has increased over the last month. The reason interest rates move can be complicated and depends on a number of factors.  Safe to say that, at the moment, long term interest rates seem to be going up whereas short term interest rates seem to be stable or moving slightly lower.

For 2021 (the short term) we’re betting the Reserve Bank will want to continue to stimulate the economy, as a result mortgage interest rates will remain low but are unlikely to get much lower. The fall out from Covid-19 is unlikely to have settled by New Year or even Easter, in which case you’d not see a significant jump up in interest rates before mid-2022.

So should you wait to re-fix your interest rate?

As for waiting for a lower interest rate, the high floating interest rates you would be paying in the meantime may make the risk not worthwhile, especially given no sharp drop in interest rate is expected. 

To see what sort of rate drop you would make staying on floating rate worthwhile, let’s look at a scenario where the floating rate is 1.2% higher than the fixed rate - in other words, you could fix for 1 year at 2.25% or leave your mortgage floating on 3.45%. 

In this example, you are paying around 0.1% per month higher (1.2% divided by 12 months) so you need the 1 year fixed rate to drop by that much to breakeven. In other words, if you thought the 1 year fixed rate was going to be less than 2.15% in one month time, 2.05% in two months time etc, you would leave your mortgage on floating. If that doesn’t seem highly likely, then fixing would seem like a better option for you.

Given those numbers, the best strategy for many may be to lock in a 1 year or 2 year rate and use the savings gained from the low rates to pay down as much of your mortgage as possible. Then, when rates start to increase you’ll have significantly less principal to pay interest on.

But we could be wrong. See disclaimer at top of article. Remember also that personal circumstances and future plans are very relevant when choosing how long to refix your mortgage for. Talk to a mortgage broker for advice specific to you.

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