Rates Dropping - Woohoo!

Rates are certainly on the way down. As of September 16th, 2024, the 6-month rate is around 6.8%, the 1-year rate is about 6.2%, and the 2-year rate is approximately 5.7%. You can see there’s quite a difference between these rates, so the fixed rate you choose could significantly impact your regular repayments. By the time you read this, those rates will likely have changed, and so will the best strategy. However, with the risk of being obsolete, let’s dive in.

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My Mortgage Advice to My Clients

Every day, I talk to my clients about refinancing their home loans. These conversations follow a very similar structure, so let me give you the inside scoop as to the current mortgage adviser refix conversation—my current refix template follows:

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Assessing Major Changes

Before deciding what to do with your home loan, we need to check if there are any major changes coming up in the next couple of years. For example, are you planning to buy or sell a house? Moving overseas? Any uncertainty around your income? These big-picture factors will affect the advice I give and the considerations you need to make. Let’s talk about these before making any decision.

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Timing Your Fix

‍ In the current environment, it generally seems better to hold off until the last minute to fix your rate. However, if you want to restructure your lending—for example, move between fixed and floating, split your loans, etc.—that can take weeks to organize, so don’t wait too long. Similarly, if you want to chase some cash and refinance your loans to another bank to secure a juicy “cash contribution,” this could take 3-4 weeks, so don’t wait too long. While it seems likely that rates will continue to drop, everything comes with risk. If you hold off fixing your rate, who knows what will happen in the next few weeks? As of today, it seems pretty sure that rates will continue to fall for some time. However, if we could pick the future with certainty, then who knows where we would be.

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Choosing Between 6-Month and 1-Year Rates

‍ Most of my clients are deciding between a 6-month and a 1-year rate right now. A few months ago, it was a clear-cut decision to fix short for six months because the rates were quite close, and in a decreasing interest rate environment, it made sense to fix for a shorter period. Now, the 6-month rate is around 0.6% higher than the 1-year rate, which is significant. You might have checked out my last video. Based on the above interest rates I quoted, the 6-month rate would have to be more than 1.2% lower in six months to make it worthwhile to go for this rate. Given the current rates, most of my clients are now leaning towards the 1-year rate. I can’t help but think the banks are artificially holding that 6-month rate high; it MAY drop quickly at some stage to align with the other rates, but at the time of writing, that isn’t the case.

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Final Thoughts

A teaser for the next few months. Two topics haven’t been that relevant over the last few years, but that is all changing. Stay tuned for more information on:

• Break Costs: As rates drop below the rate you’ve locked in, the risk and size of break fees will increase. Be clear about potential break costs before making a decision. Stay tuned for more information on this.
• Opportunity to Save: If you’re locking in a lower rate than you’re currently on, you have a significant opportunity to reduce the length of your loan, and the total interest paid. If you can afford to keep your payments the same even though your rates have dropped, you’ll be significantly better off. Let’s discuss the best way to structure this for your situation.

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‍Get some advice

Stay tuned and take some advice. Let’s talk through the above and make a decision that’s right for you. If you are an existing Velocity client, it won’t cost you anything, and it can help to clarify the options you have. As you can see, there are options and some complexity in a quickly shifting environment. Our job is to help support you to have a good strategy in place that works.

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.

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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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Always get professional advice

The information shared in this post is meant to be general guide to support you on your journey. When making important decisions about your finances, we encourage you to seek independent financial advice first, tailored to your unique situation.  As well as talking with a financial adviser, make sure you talk to your lawyer and accountant too – together they'll help you find the best solution for your specific situation. Our knowledgeable financial advisers are here to help. Check out our website for the details about our financial advisory services in our disclosures  https://www.velocityfinancial.co.nz/disclosure-statement.

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