In the current interest rate climate, how long should you fix for? Mortgage adviser Ryan Smuts, of Kris Pedersen Mortgages, gives two potential options.
Interesting things are happening with the interest rate curve. On one hand we have the short-term interest rates (6 month to 2 year) which look set to stay reasonably low in the next year or two, meanwhile longer-term interest rates (4 to 5 year) are already trending upwards.
Many banks were giving rates of 2.89% to 2.99% for the longer-term interest rates. Now, some are doing this, while others have already begun to trend upwards to around 3.09%. Some have even gone to 3.49%+ for these terms.
Short-term rates however start at around the 2.29% mark and have stayed there since around January.
So what does this mean for you as a borrower? How long should you fix for? Should you fix at all?
We often get this question as mortgage advisers. It’s important that I start by saying there isn’t a ‘one-size-fits-all’ model for mortgages, nor is this designed to be specific mortgage advice. It’s rather things to consider for your own mortgage strategy if you decide to go at things alone, or without seeking personalised advice for your own situation from a mortgage adviser.
You could fix for the long-term
If you want to lock in some certainty, now would be a good time to do it before you miss out on low long-term interest rates. This could be a good option if you carried any significant amount of debt (which is basically anyone with a mortgage in a larger town centre currently, the way prices have gone).
This allows you (while paying a slight premium upfront) to hedge your bets with your mortgage in the case of interest rate increases. While we are (and have been) in a decreasing interest rate environment, many people have gotten used to chasing a lower rate, which has had significant benefits. But if things turn the other way it may not be as fun.
Or you could split your mortgage
It could also be worth splitting your mortgage up to have some on long-term interest rates (e.g. 5 years), some on short-term (e.g. 1 year) and a smaller portion on floating to allow you to make additional repayments with flexibility and without penalties.
An example I often use is as follows:
Roughly 12 months ago, a 1-year interest rate was about 3.34%. Today that is around 2.29%. This is just over 2/3 of the cost, so those with interest rate expiries are seeing dramatic changes. For example on $1,000,000 worth of debt, your interest costs go from $33,400 p/a ($2783.33 p/m) down to $22,900 p/a ($1,908.33).
This scenario is extremely favourable as a borrower, and theoretically you could borrow around another $458,500 worth of debt and still pay the same amount in repayments a year later. You can see how this can begin driving asset prices up.
A word of caution however, if things went the other way, you’d be looking at a ~46% rise in interest costs (from 2.29% to 3.34%).
Information correct as at 30 March 2021. Pie Funds Management Limited is the issuer and manager of the JUNO KiwiSaver Scheme. Click here for our Product Disclosure Statement. Any advice is given by Pie Funds Management Limited, and is general only. It relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees if you act on any advice As manager of the Scheme we receive monthly fees that are determined by your balance and whether you are 13 years or over. We will benefit financially if you invest in our products. We manage any conflicts of interest via an internal compliance framework designed to ensure we meet our duties to you. For information about the advice we can provide, our duties and complaint process and how disputes can be resolved, visit www.junofunds.co.nz. All content is correct at time of publication date, unless otherwise indicated. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary. Please let us know if you would like a hard copy of this disclosure information.