With mortgage rates at a record low should borrowers lock-in or wait?

Record-low rates mean cost-savings for borrowers: could they go lower?
Record-low rates mean cost-savings for borrowers: could they go lower? Photo credit: Getty.

As mortgage interest rates fall to new lows, the key question for borrowers is can they go lower? 

In the COVID-19 environment of economic uncertainty and rising unemployment, every dollar counts. Fixed mortgage interest rates, such as Kiwibank's one-year fixed term rate of 2.69 percent (offered by ASB for two years), are already very low - but is now a good time to lock in a new rate or will they drop further?

Newshub asked Jarrod Kerr, chief economist at Kiwibank to comment on whether interest rates might fall further.  For home buyers, including homeowners with existing mortgages on a higher fixed interest rate, Campbell Hastie at Hastie Mortgages answers key questions about when to lock in a new rate and how long to lock it in for.

Are interest rates forecast to drop again in the short-term?

In Official Cash Rate (OCR) and Monetary Policy Statement reviews on March 16 and May 13, the Reserve Bank indicated that the OCR, currently 0.25 percent, would be held for a minimum of 12 months. 

Wholesale interest rates are unlikely to fall into negative in the short-term, but banks have been asked to have systems ready to accommodate them by the end of the year.  

Kiwibank chief economist Jarrod Kerr, said that the Reserve Bank is doing all it can to push down interest rates. Retail interest rates may go lower, but the extent to which they do depends on how existing low-interest rates flow through.

"The central bank wants easy financial conditions and that includes lower interest rates and lower currency," Kerr said.

When is the right time to lock in a new rate?

Mortgage broker Campbell Hastie, said that as low interest rates are likely to be around for some time, borrowers with mortgages on fixed-term rates shouldn't be in a hurry to lock in a new fixed rate. 

He encourages borrowers to start looking at options two months' before their fixed rate comes up for review - but wait until right before the fixed term expiry date before locking in a new rate. 

"Think about it, but don't act straight away: you might lock something in and then two weeks' later, rates fall," he said.

Should borrowers who have come off a fixed interest rate sit and wait on a floating rate?

Borrowers on a fixed-term interest rate that's already expired may be tempted to leave all of their mortgage on a floating rate and wait for interest rates to drop.  

In Hastie's opinion, this option is too expensive. Depending on the borrower's needs, he suggests looking at a one or two-year fixed interest rate - or a mix of both.

"Don't sit on a floating rate - that's too expensive relative to a fixed rate," Hastie said.

Given that the trend for interest rates is a downward one, and no one knows exactly how quickly things will keep going down, borrowers should be looking to keep the fixed rate time-frame short.

"Just go to one-year," Hastie suggested.

However, he adds that some borrowers need certainty, and if that's the case, fixed rate specials, such as ASB's current two-year rate of 2.69 percent, is an option.

"If you're the type of person who needs certainty to sleep at night, maybe you should take it," he added.

How can borrowers get certainty - and take advantage of lower rates in the future?

Hastie said that he often advises clients to look at a dual strategy which provides certainty as well as the option to get a lower rate in the short-term.  To achieve this, the loan is split into a couple of chunks.

"One, you fix for a two-year period - providing a longer period of certainty - and the other chunk, you fix for one year.

"That gives you the ability to pick up on a rate that may fall," Hastie added.

In Hastie's view, the 6-month rate is too expensive, as from 4-to-5 percent, it's too close to the floating ('variable') rate.

"[Currently], there's no real value going to the 6-month rate," he added.

Should borrowers get a quote to break their existing fixed term rate? 

Borrowers on a higher fixed term mortgage rate can look at breaking their fixed mortgage term to get their repayments lower. However, in many cases, savings on moving to a lower fixed rate are eaten up by the break fee.

"The cost of breaking is normally [around] equivalent to the interest-saving you would otherwise make.

"You either pay the interest cost over the next few months (until expiry of the fixed term) or you pay it all in one hit: either way, you're paying it," Hastie said.

With one and two-year fixed interest rates now as low as 2.65 and 2.69 percent, new borrowers are able to lock in record-low rates.  For existing borrowers coming off a higher fixed rate, those extra savings can be used to pay off debt faster, put into a rainy day fund, used to buy essentials or spent on something they enjoy.