For many, it is time to refix their home loan again, and everyone wants to make sure they get the best deal, which is certainly understandable after a period where rates were high. I get the same questions daily from my clients: How long do I fix for? When do I fix? Should I float a bit longer? As interest rates are decreasing and the OCR announcement is just around the corner, there are many factors to consider! So let me assist.

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Some assumptions first..

Firstly, let’s assume that there aren’t going to be any material changes to your situation in the next few years, i.e., you won’t need to sell the house, you won’t get an inheritance in the foreseeable future, etc. (If there are going to be some changes, then your strategy needs to reflect these things.) Let’s also assume that you have thought through your debt reduction strategy and have an amount of your loan in an offset or revolving credit account, or you will make extra payments into your fixed loan (or you are in a position just to pay the minimum amount). Let’s assume this is all set up so we can leave this issue to the side.

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Let’s factor in the economic variables here

At the time of writing, a good (discounted) 6-month rate is around 6.3%, a 12-month rate at 5.8%, and a 2-year rate at 5.65%.

Now, here are some variables to consider. There is an OCR announcement by the Reserve Bank on 27th November. The mainstream expectation is that this rate will drop by 0.5%. Do note there is a good chance the banks' floating rate will drop by something close to that soon after the announcement. The fixed rates MAY drop, but this could take some days or weeks, and much of this drop has already been “priced in” to the banks' cost of funds, so don’t necessarily expect a 0.5% drop in fixed rates on the 28th of November. The mainstream thinking is that NZ fixed rates will continue to drop over the next 12 months, with predictions indicating around another 1% decrease during this period. The wholesale rates (i.e., the interest rates that banks “buy” money at) have nudged up over the last month. This seems to be because of the US elections. This has created significant uncertainty in the money markets. Does this uncertainty raise some questions as to the NZ fixed home loan rate projections through 2025? To be honest, I am not sure anyone really knows the answer to this.

The mainstream thinking is that NZ fixed rates will continue to drop over the next 12 months, with predictions indicating around another 1% decrease during this period.

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So, what period do I fix for then?

If you follow the mainstream prediction of further decreases in rates, I think it is hard to go past the 1-year rate right now. The 6-month rate is still around 0.5% higher than the 1-year rate, so unless there are some rapid decreases to this (i.e., a drop of 1% in the next 6 months), all other things being equal, you would be better off with the 1-year rate. It would seem to me that fixing for longer than 1 year risks the chance of fixing for much lower rates in 12 months' time.

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It would seem to me that fixing for longer than 1 year risks the chance of fixing for much lower rates in 12 months' time.

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If rates are still dropping, when do I fix?

I have lots of clients whose fixed rates are rolling off about now, or who are settling houses now, who are choosing to stay on a floating rate until after the OCR announcement on the 27th of November in the hope of locking in a lower rate after that. I understand the logic, and if rates drop quickly after the 27th, then that will have been a great choice. I would, however, suggest caution for sitting on a floating rate for too long. The maths gets kind of complex, but you are paying a premium for being on that floating rate, and rates will have to drop quite a bit, and the longer you are on a floating rate, the bigger the drop will need to be. As per the above, there are no guarantees of the size or timing of any fixed rate drops.

I would, however, suggest caution for sitting on a floating rate for too long.‍

We live in uncertain times, and your decision on when and how long to fix your rates will come down to the current predictions on interest rate movements along with your risk tolerance. Given this, there is no right or wrong here. I can’t tell you the right thing to do, but I (or your Velocity Financial Adviser) am here to work through the options with you. We can give you a recommendation, but do be aware, it is based on best estimates and assumptions of what will happen in the future.

I hope that helps at least somewhat as you decide whether to fix or float!

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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 our 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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