‍In today’s market, a good* one-year fixed home loan rate is 3.39%, a two-year rate under 3.5% and a three-year rate at around 3.8%. You can expect to secure a floating rate for under 5%. (* This assumes an owner-occupied property with sufficient equity.)  

So, what should we all do with our mortgages? Fix or Float?

If you read the Christmas edition of the Velocity Spin it would be abundantly clear that it is tough to predict what will happen to interest rates in a year’s time.  So, given such unpredictability, here are some options:

1)     Take the cheapest rate, regardless of how long it is fixed for. Right now, that would mean fixing for one year. This is very much a “live for the day and let tomorrow sort it self out” type strategy, but can make sense, particularly if there are no signs of increasing local or international economic growth that may push up rates in the future. This is also a great strategy if you are re-fixing a loan off a higher rate and you are disciplined enough to save the difference in mortgage payments, or keep the payments voluntarily high. It is a good strategy if you can afford for rates to go up without encountering hardship. It can be a good strategy if your circumstances are going to change in a year or so and you expect to be able to pay down your loan (for example, through an inheritance or selling your property).  

2)    Take the three-year rate. This can be a good strategy ironically if you have a tight budget. If you know you can afford the repayments, it means that you have three-years or certainty.

3)    Split the loan in to two or three fixed sections (tranches). This is a classic interest rate hedging strategy and means whatever happens to rates, the change in payment will be reduced as much as possible. You aren’t paying the very cheapest now, but if things change it won’t impact you by so much.

4)    Keep it floating. This can be great if flexibility is important, if you have significant surplus funds each week, or are expecting a lump sum (e.g. a work bonus or an inheritance) or you are planning on selling and paying the loan off. The variation to this that many people use is to keep a small amount floating to provide that flexibility while fixing the majority of the loan.

Your Velocity Adviser, while not being able to predict the future, will work with you to come up with a plan that suits your situation. Give us a bell.

Brendon Ojala is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.