Economist weighs in on whether now is the right time to fix
Homeowners and prospective buyers will welcome the Reserve Bank of New Zealand's recent decision to reduce the official cash rate by 0.50 percentage points, which will flow through to lower mortgage rates for those who have a floating rate. The rate cut also raises the question of whether people should now fix; and, if so, for how long.
Commenting before the Reserve Bank decision, independent economist Tony Alexander noted that, historically, it was unusual for New Zealand to have a three-year fixed rate lower than 4.99%. With that in mind, he advised borrowers to think carefully before holding out for rates to drop significantly further.
Mr Alexander also discussed whether borrowers who locked in a five-year fixed rate of 2.99% in 2020 or 2021 should consider breaking their loan and refixing. He noted: “If I break, will the bank pay me out the 2.0% difference for the remainder of my five years? Probably not. Do I think there is a strong risk of fixed mortgage rates jumping a lot higher in the next 14 months? No. So, if I were in such a position, I would run the 2.99% out to its maturity and continue congratulating myself on being clever for fixing back then rather than taking the candy of the 2.29% for one year.”
Fixed vs floating vs split
Mr Alexander’s thoughts are general advice only. Please contact me to discuss what you should do for your personal situation, because that will depend on your unique goals, risk profile and financial position.
When it comes to structuring your home loan, there are a few key factors to consider. Fixing your loan provides certainty, as your repayments stay the same for the length of the fixed term. This stability makes it easier to budget and protects you from potential interest rate rises. However, breaking a fixed-term loan early can result in break fees, and you may miss out on savings if interest rates drop further during your fixed period.
On the other hand, a floating-rate loan moves in line with market interest rates, meaning your repayments could increase or decrease over time. One thing to keep in mind is that interest rates move in cycles. Over the course of a 30-year mortgage, rates will fluctuate, sometimes unexpectedly. That said, a well-structured loan isn’t just ‘set and forget.’ A floating rate provides flexibility to make extra repayments or lump sum payments without penalty, potentially helping you pay off your loan faster and save on interest.
For many borrowers, a split-rate mortgage can offer the best of both worlds. By dividing your loan into fixed and floating portions, you can balance stability with flexibility. The fixed portion provides certainty in repayments, while the floating portion gives you the ability to make extra payments when it suits you.
To help your decision-making process, I can calculate different repayment scenarios tailored to your situation. Get in touch, and let’s find the right loan structure for you.