When it comes to mortgage repayments, I see both a proactive and reactive approach adopted my clients. These are personal decisions based on everyone's individual circumstances and goals,  and not one size fits all. But there is merit to adopting a proactive strategy, if you can, and I'll tell you more below.

Before delving into my story, let's look at the current mortgage rates situation in more detail,  and some of my suggestions around that.

Interest rates have slightly risen in the past month. (But yes, we think if rates aren’t now at their peak, they are awfully close.)

The numbers

Presently, the interest rates are as follows:

1-year discounted fixed rate: approximately 7%

2-year discounted fixed rate: around 6.75%

3-year discounted fixed rate: about 6.5%

As expected, the options I'm presenting to clients (as predicted) are feeling a little like Groundhog Day.

My suggestions

When I am asked (literally daily), "What period should I fix my Home Loans for?" here is what I say:

There are two key pointers to consider: The timing of your rates roll off, and hedge your bets.

The timing of your rates roll off

This means, aim for your new fixed rate to roll off when interest rates have started to drop.

The obvious follow-up question is, "When will that be?" I am not a great predictor of the things yet to be seen; however, the current mainstream thinking (reserve bank, economists, etc.) is that rates are likely to start easing in the second half of 2024.

I think based on this the “sweet spot” when refixing now is somewhere in the 1 year, 18-month, 2-year fixed period.

I worry inflation will be a little stubborn, so higher rates may drag on, but I do not want to be on a high rate too long. In case it is of interest, I personally have just locked a loan in, and I chose the 18-month rate.

Hedge your bets

The other part of the equation is around "hedging your risk." If you have other rates that are rolling off in 1 year, you are certainly putting all your eggs in the one-year basket if you fix another loan to roll off around the same time. If you just have one loan (particularly if it is larger and if the consequences of substantial changes in payments would be material for you), then splitting your lending between fixed periods can provide a strategy to reduce that risk.

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And now for the Story

The lesson here is one that may need to be stored away for the next few months before it can be actioned. Consider a proactive vs reactive strategy going forward.

Reactive means you are paying the minimum repayments on your mortgage. When rates increase, the difference between your old vs. new repayments can be larger.

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Proactive means you are paying above the minimum, so when rates increase, the impact on your new repayments will be less, because the difference is smaller.

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Based on the above, I am having two vastly different conversations with clients right now.

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One conversation is not easy (and there are no judgments here), but some clients are moving from minimum repayments from 2% to 3% or 4% on to 6%+ and their repayments are massively increasing. This is hurting and a real stretch to the family budget (if you can relate, look here for your options).

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On the other hand I have clients who say, "Well, the rates increase sure hurts, but I was paying this much already (or more) last time rates were high, and when rates started to drop, I kept my payments the same. So, now when rates are going back up, my payments are staying the same. (I am just not paying the loan off quite so fast as I was now, so it does not feel as great, but in terms of repayments it is business as usual.)" Their proactive payment strategy has been planned and the habit of paying higher amounts is already ingrained. Therefore the impact is less.

I fully realize everyone will not be in the position to do the latter, but store that repayment option/proactive strategy away for when rates do start to drop again. Paying extra when you don't have to will get your loans paid off quicker, and you will have that habit ingrained when rates do rise again.

A word from the wise

One last thing. Do have a chat with your adviser before you lock a new rate. It has never been easier to click the button on your internet banking and get that bit of ‘life admin’ quickly sorted... but you may not be making the most economical or safest decision without seeking advice first.

We will often point you back to this option, but having a quick check-in first can be a wise step.

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.

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