Fixed vs Floating

No change in the OCR this month. Does this signal a change in the outlook for interest rates? Does a change mean a good time to fix? Brendon shares his personal plans for fixing his mortgages.


Part A: The Facts:


On Thursday, 9 June, the Reserve Bank left the Official Cash Rate (OCR) unchanged at 2.25%.


The messages given by the Reserve Bank have led the commentators to be a little less confident in their prediction of a further drop in rates this year. However, most are still predicting one more rate drop this year before a period of stability.


A good 1-year rate is currently at 4.10%. A good 2-year rate is 4.25%. A good 3-year rate is 4.39%. (Please note a big disclaimer here: The ability to secure rates is very much dependent on the loan-to-value ratio as well as the size of the deal.  So please keep this in mind when comparing interest rates!)


Interest rates in New Zealand are determined by internal factors such as the OCR. They are also determined by international factors such as the U.S. interest rates. The latter had been picked to rise, however, these expectations were somewhat flattened over the last few weeks on the back of concerning U.S. economic data. This all means there may be a little less pressure on New Zealand’s longer term interest rates.


Part B: Back to the original question … To fix or to float?


Around half of my personal mortgages are coming off of their fixed rates in the next month. So I am considering my options. Of those mortgages that remain, some are floating and some have about a year before they roll off fixed rates. My current belief is that rates are going to stay fairly steady over the next year or two.


I am also in a situation where an increase in interest rates won't have a significant factor in my overall budget (this is related to my level of other expenses as compared to my income!!). However, to be honest, I, like everybody else, really don't know what's going to happen to interest rates. Economic conditions change, and these changes aren’t always predicted.


In light of all this, I am going to fix half of my loans for one year and fix the other half for two years. Because I already have some loans on revolving credit, I have the ability to pay off extra on my mortgages. What I will also be doing is keeping my current overall payments the same. The 1.5% drop in rates will have a significant effect on the length of my mortgages. (If I was being very aggressive I would put those savings in to my revolving credit account. However, I have decided I want the guaranteed reduction in loans as compared to the flexibility to withdraw these funds out of the revolving credit account.)


Not everybody is in the same situation as I am of course or have the same opinions about interest rate movements. So your decision might be different to mine, but at least you have an insight into how I am responding to the current climate of interest rates.


At Velocity Financial, although we are not fortune-tellers, we can assist you to make sensible decisions about your mortgage interest rate choices and your loan structures. We’d love to help you look through the options.


Brendon Ojala is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.