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The big news of the last month was the increase in the Official Cash Rate (OCR) by the Reserve Bank, on the 5th of April.
Most economists and commentators were expecting the rate to rise by 0.25%, but wouldn’t you know it, the Reserve Bank surprised everyone and increased the rate by 0.5%.
This led to wholesale rates (the rates that banks can ‘buy’ money for) jumping up immediately, however there was no immediate change to banks’ Home Loan interest rates.
Short Term Rates went up as expected.
At the time of writing, 10 days later, two banks have increased their floating, 1- and 2-year rates. I am sure when you are reading this, the other banks will have followed suit and increased their short-term rates as well.
Long term rates?... Well…
One of these banks has dropped their 3–5-year rates by 0.5%, so there is now a big difference between the short- and long-term rates.
Here is the temptation, and it is kind of like resisting eating all that Easter chocolate in one weekend…
The temptation is offers like a 5.99% 5-year rate. A prayer for strength to resist locking this in may be required here!!
The Reserve Bank will not be happy by these long-term rate decreases by the banks, as they noted when they increased the OCR that the reason they put this up, wasn’t so much to make Interest Rates rise, but to stop them from falling…
“A 50-basis point increase in the OCR was seen as helping to maintain the current lending rates faced by businesses and households, while also supporting an increase in retail deposit rates”. Reserve Bank’s Monetary Policy Committee.
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Go for the sweet spot and stop there.
My feedback hasn’t changed from last month. I still think the “sweet spot” is to fix somewhere within in the 1–2-year range. This time frame will give rates a change to nudge up a little more, hold that position for some time, and hopefully start dropping before you need to refix again.
Don’t be tempted, unless you must.
I understand you will be tempted by locking a lower 3–5-year rate to hit the lower repayments now, but there is a good chance you will be paying for that in a few years’ time, as rates come back down. If you want or need the certainty, and you are OK with the repayments, then perhaps for some it will be a good decision to give in to that temptation. But for most, I am not so sure.
Don’t put all your (Easter) eggs into the one basket.
For many clients separating your loans between different fixed rates makes sense. There are always pros and cons to this, however in a world of uncertainty, splitting your loans into different suffixes does protect you from large changes in payments.
Get a long-term debt reduction plan into play.
Having a clear debt reduction strategy is key. Having a plan to get your Home Loan paid off as quickly as possible is a critical long-term play. Do talk to your adviser about the best option for you.
Think outside the (chocolate) box for different ways to pay your mortgage.
If you are concerned about the increased payments, check out this video where we run through all the options if you simply can’t meet the increased payment. Keep an open mind and explore your options.
I hope that is of some use in these trying times. Do get in touch with your adviser. It is our job is to give you advice about these things!
Til’ next time,
Brendon.
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.
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.