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