For those of us who follow interest rates closely (yes, I am living the dream) it has been a fascinating couple of months.

Late last year there was a tight range of mortgage interest rates on offer; a 1-year rate around 6.5%, through to a 5-year rate of around 7%.

The excitement is now that the longer-term rates (i.e. the 3, 4- and 5-year rates) are lower than the shorter-term rates. It is now cheaper to fix a home loan for 5 years rather than 1 year.

Does that mean that when you are due to fix, you should fix for 5 years?

While everyone’s situation is different - and of course we don’t know what rates will be in the future - it is very unlikely that this would be a good strategy.  Yes, you would have the cheapest rate possible for the next period, BUT the expectation is that rates will peak soon and then start to drop (notice the careful use of the vague term “soon”.)  The fact that longer term wholesale rates (the rates at which the banks can ‘buy’ their money) are lower than the shorter term, would tend to support this expectation.

Earlier last year I was suggesting fixing for around 2-3 years seemed to be the “sweet spot” to protect against rising rates, while being able then to take advantage of falling rates.  Late last year I pulled this back to 2 years, and then 18m-2 years.

I still think that is where I would fix my Home Loans for, however many are saying 1y-18m range will get us over the interest rate peak and allow for rates to start dropping.

Interest rates of course are influenced by many factors and so is of course an “imprecise art” and ever adjusting as reality comes to bear.

Can I suggest you talk to your adviser, think through what the next 2-3 years look like for you.  Work out what the actual payments will be and what you can afford, and let’s come up with a plan to get you through the next period.

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Brendon.

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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.

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