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By Brendon Ojala
It has seemed clear to most economists and commentators for a few months now that interest rates had hit their bottom and the question was when they would start rising. And, in July, rise they did.
Earlier in the year, most were predicting interest rate increases sometime in 2022. As the economic data started to improve and inflation expectations started to rise, those predictions started to get nearer.
One to two months ago, long-term fixed rates increased (spurred on by increases in overseas interest rates). Short-term fixed rates stayed steady. Then, in mid-July, it seemed out of the blue, banks went BANG and increased all fixed home loan rates by at least 0.3%.
There are lots of theories as to why this happened, but let’s not get bogged down in that here.
The question is, as someone who has a home loan, what do you do with your interest rates?
My short answer is, don’t change your strategy. It is business as usual.
My longer answer…
1) Don’t panic. It is very seldom a good idea to change your home loan strategy due to a one-off change in rates. Rates were expected to rise. Granted, it took most people (including us, to be honest) by surprise that they moved so soon. However, a good strategy is still a good strategy.
2) The decision still stands … do you fix for a series of short-term rates or do you lock in for a longer timeframe? Over the last year we have been encouraging most of our clients to make a decision by either fixing for a series of shorter-term rates (that, over the long-term, will hopefully still be cheaper) or if they wanted (or needed) more certainty to fix for a longer period. They would pay more for that in the short-term, and if rates go up significantly through that time, they may be better off. Don’t forget, if you take the shorter option, you will win in the short-term, and feel good about this. However, in the later years, you will likely (but by no means certainly) be paying more interest (and wish you had fixed for longer).In these periods it is important to remember the strategy and the earlier savings.
3) We don’t know what will happen to interest rates. If the next few years are“business as usual” then it is likely rates will continue to increase. However, surely that is far from certain? Another Covid lockdown could have serious impacts on our economy and, who knows, rates may drop again, which leads back to point 1 and leads on to 4.
4) Think about your personal situation and not just what is the best rate. Your best home loan strategy will be personalised to your situation: how risk averse you are, how much surplus cashflow you have from week to week, what your financial goals are, etc, etc.
Although your Velocity Adviser can’t predict the future, we can work through the best interest rate strategy for you.So don’t hesitate to have a chat with us before you re-fix your home loan.
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. A disclosure statement is available here on our website.