Fix, float or both: Making the most of current mortgage rates

Should new borrowers hold out for better fixed rate deals?
Should new borrowers hold out for better fixed rate deals? Photo credit: Getty

The Official Cash Rate (OCR) remained unchanged at 1 percent in November, leaving people holding out for a further drop in mortgage interest rates disappointed.  

Given the next OCR review date is not until February, with several economists predicting the likelihood of further cuts in 2020, should new borrowers sit on their hands and wait for a better deal?

Newshub spoke with a senior economist and a mortgage broker to understand the pros and cons of locking in - and breaking - a fixed interest rate now.

Chief economist at ASB Nick Tuffley said that assuming the Reserve Bank cuts the OCR next year, floating rates are likely to fall a bit further, but often the cheapest option is a fixed-term rate.

"If people wait on a floating rate (or fix for six months) in the [hope] of fixing [again] if rates drop next year, they are paying a higher rate in the near term." 

Additionally, there's no guarantee that fixed rates will fall below the levels currently available.

"[Fixed rates] were cut last month, at a time when wholesale rates were substantially lower than they are now," Tuffley said.

The last few months have provided the perfect storm, to the benefit of borrowers.

"Even if the Reserve Bank does eventually cut the OCR to 0.5 percent, we still assume, [fixed] term interest rates may not drop back to the levels of last month [October], Tuffley added.

What are the most competitive fixed interest rates right now?

While not for everyone, fixed interest rates give borrowers certainty around the cost of their repayments. This may be ideal for people on a strict budget, or who dislike fluctuations in rates.

People looking to buy a home or existing borrowers due to roll off a fixed interest rate are wise to compare current specials and discuss their options with their broker or bank.

Current specials to fix for 12-24 months:

On Tuesday, three leading New Zealand banks confirmed the following fixed rate deals:

ASB:

  • 3.39 percent for 12 months
  • 3.55 percent for 24 months.

BNZ:

  • 3.45 percent for 24 months (two years).

KiwiBank:

  • 3.39 percent for 12 months (1 year, requires 20 percent deposit).

Should I break an existing fixed interest rate?

People on fixed rates (fixed mortgage rates or term deposits) have contractually committed to a set rate for a particular term and will continue with that interest rate until the end of the term. 

While fixed rates can seem attractive at the time they're taken out, if market conditions change, borrowers wanting to save money by re-fixing their mortgage at a reduced rate are likely to be hit with an upfront cost.

Auckland mortgage advisor Shafeel Aktar said that as fixed rates are based on wholesale rates at the time the loan was taken out, the cost to break the fixed loan differs.

"As a [recent] example, one of my clients on a two-year fixed rate of 4.45 percent had a loan of $215,000 and the break fee was $1,277.

"Up to a year to break even [on interest rate savings] after paying the break fee is a good rule-of-thumb," Aktar said.

Break fees on two-year loans are considerably less than three or five-year loans - although, after the GFC, it's become less common for borrowers to fix for more than two years. 

"If borrowers on fixed rates want to look at moving to a lower rate, I suggest they ask their mortgage broker or bank to calculate the break cost and do a savings analysis," Aktar said.

Should I choose a fixed or floating rate - or both?

Borrowers who want to be able to pay a lump sum off their mortgage, or make extra payments without penalty, are likely to find a floating rate more suitable.

Others could choose either a revolving credit facility (assigning a fixed and floating interest rate to set amounts), or putting all of their borrowings on a competitive fixed rate. 

Based on ASB's current economic data, the outlook for borrowers indicates that the cheapest options are to fix for short terms of up to two years.

"The current advantage of the two-year rate is that it still gives two years of certainty at a very low-interest rate, that is not much higher than the shorter-term fixed rates.  

"The current rate is also only 10 basis points higher than its all-time low," Tuffley confirmed  

However, as with all economic forecasts, positives and negatives must be weighed up, so locking in a rate now includes an element of guess-work.

"If interest rates did fall back down over the next year, a borrower would not be able to take advantage of those lower rates (at least not until the two-year term expires)," Tuffley explained.

The current environment of low-interest rates means borrowers can afford to take their time choosing a property - and compare rates - before committing. 

Although there's still room for mortgage rates to head south, people holding off buying a property in the pursuit of an even lower fixed rate next year may be disappointed.

 

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