Fixed vs. Floating



By Brendon Ojala


Now that we’re all getting used to seeing interest rates starting with a three, has the time come to lock it in for the long haul? And are there any hidden catches with these super low rates? Brendon answers all.

You will have seen banks advertising one- and two-year rates at 3.79% in the last couple of weeks. The trick with these is to watch for the little "conditions apply” asterix.

To secure these incredibly low rates you generally need to have a 20 per cent deposit, it needs to be your owner-occupied house, and the bank needs to be your "main bank" (that usually means you need your income going in to one of their accounts, and some times they require another product like a credit card or insurance with them).

It is pretty hard to go past these current low rates. Plus, there doesn't seem to be a lot of upside risk to interest rate rises, either in NZ or offshore. As I have been banging on about all year, the only upside risk I see is the Reserve Bank imposing new "capital requirements" on to banks which could lead to rising rates—so just watch for this at the end of this year.

The big news of the week of course was Official Cash Rate drop by half a percent. This level of drop caught almost all by surprise, and has led to banks dropping their floating rates (and at time of writing, some banks are also nudging down their fixed two years rates). The big question is this: how much lower can home loan rates go?

If you subscribe to the belief that rates will keep going lower, you would be fixing your interest rates for a short period (probably a year) and hoping that in a year they are even lower. You may also hold of locking in your rate, until you need to. You will start getting letters from the banks and emails from us 8 weeks prior to the refix date. In a world of lowering rates not rushing in would seem like a sensible strategy. If you are a little more conservative, you may be happy to lock away a sub-four per cent three-year rate, so you know what your mortgage payments will be for awhile yet.

Regardless of rates, you should seriously consider keeping some flexibility in your mortgage, because if you can pay a little more, you are going to save SIGNIFICANTLY on the amount of interest you pay to the bank over the course of the loan. How do you do this? Well, that’s an individual conversation, so don't hesitate to get in touch with your Velocity adviser to make sure you’re making hay in this sunny patch of interest rate weather.

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.