It is now one year on (unbelievably) from when we were fixing many of your mortgages for a super low, 1-year rate, of 2.29%.

As these low rates are starting to roll off, many have tough decisions to make...  and for some it will feel like choosing between "not great" options and, "even worse," options!

‍How should we fix?

Designing and choosing a fixing strategy can have a huge impact on our lives, especially when we are looking at increasing rates.

As mortgage brokers, we get asked this a lot by clients.

Do we refix our Home Loan again for a 1-year period (3.6%, at the time of writing) or, fix for longer (2 years at 4.3%ish, or 3 years at 4.6%ish, or 5 years at 5% ish)?

Each of the above options feels a teensy bit painful after the sweet, low interest rates of the past. For many who have just started their home ownership journey, this will be the first time they have seen an increase in rates, and it can be a bit scary.

So, in the answer to the above fixing dilemma will depend on:

a)  What interest rates may do in the next few years

b)  What your personal circumstances are (for example, how much of a risk are you willing to take? How much surplus cash do you have in your budget?)

Let’s start with the interest rates.

What will interest rates do?

Interest rates are dynamic and always changing. They tend to fall and rise in cycles, based on a few external factors. That we can be certain of.  What is not certain, is by how much, for how long, and when. This can make fixing a bit of a guessing game. However, with the facts, at least you can make an educated guess and reduce risk as much as possible.

Here are some bullet points, recognising that some of these lead in different directions!

Most economists and commentators are picking Mortgage interest rates to go up in the next few years.

Many are saying that mortgage interest rates will rise. This is based on:

·      Predictions around international wholesale interest rates

·      Inflation predictions, both nationally and internationally (higher inflation tends to drive up interest rates)

·      Reserve Bank predictions of increased Official Cash Rates (that again leads to higher Home Loan interest Rates)

However, we live in a world of incredible uncertainty.  No one really knows what is going to happen to NZ or world economies over the next few years.

Furthermore, banks hiked interest rates significantly over the last 6-12 months. They have already priced in these higher costs, which are reflected in the current rates.

Balancing the above factors, I think it is sensible to assume there will be some ongoing increases in interest rates, and it would be prudent to be prepared for this.

Now, what about you!

Think about what your income and costs are looking like for the next five years

When looking to fix or float your loan, take a good look at your current circumstances and future plan for cash surpluses or potential roadblocks that you could use to your advantage or navigate around.

Personal circumstances, both present and future, need to be factored in to make the best choice

Have you got surplus cash?

If rates continue to rise, have you got surplus funds to cover this?  

If you don't have surplus cash, it may be best to lock in a longer term at a higher rate, which means you pay more now, but have more certainty about future payments (i.e. You have the same repayments for the next X-number of years.) This might make planning easier if you know that you have life changes coming up, like starting a family or house renovations for example, where you may have a drop in income or you have costs going up.

If you do have surplus cash, you may be able to accept more of a risk. You could lock in a lower, shorter-term, fixed rate. This means you pay less now, with the understanding that you may have to pay more later, if the rates have risen when your next term comes up. This may suit you if this year is going to be tough for you financially, but things are looking easier after that (e.g. you may have kids starting school next year, which means no more childcare costs, or you have a pay increase coming, or your student loan will be paid off). In this case you may choose to fix for one year at the cheapest rate possible now, realising that if rates rise from here, you will have the extra funds to pay for it.

Calculate what the interest rates will be in dollar amounts

And my final tip  before you decide on how to fix, make sure that you do the math.

That is, understand what the interest rates will be mean in actual dollar amounts to you, when it comes to your repayments.

For example, 0.75%increase may not sound like much, but if you have a big loan and this means an increase of $200 per week in dollar terms, that might be enough to make your eyes water.

If you have a smaller loan, this 0.75% increase may be much less, at only $40 a week, which could be easily manageable perhaps.

There is no black and white, one size fits all approach to fixing. Your loan strategy must be tailored to your own unique life, and that includes your today and your tomorrow too.

As always, your Velocity Adviser is available to talk through the options with you. Have a chat to us if you would like some help with your loan strategy, we are happy to help.

 B.

About Brendon:

Hi, I'm Brendon, one of the owners and advisers at Velocity Financial. I have been giving advice on mortgages and insurances at Velocity for around 15 years, and it is great to be able to work with people to achieve their financial goals. Prior to giving money advice I worked as a youth worker and managed teams for a not for profit organisation. I live with my wife and one of my sons (the other one only stays when he needs food) in Berhampore, and if I'm not talking revolving credit accounts I can be found running the trails of Wellington.

Disclaimer:

Brendon Ojala (FSP119244) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Brendon’s disclosure statement on our website.

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