The downward spiral of interest rates remains and is set to continue into 2021. So how should we make the most of these attractive rates? Fix now or wait till they’re at rock bottom?
There is without doubt some attractive fixed rates on offer at the moment. We are seeing 1-year rates of 2.39%, however, what is making your home loan refix decision harder is that we are also seeing 18-month and 2-year rates at similar levels.
The Predictions
There is almost unanimous agreement amongst commentators and economists that home loan interest rates will continue to drop in the near term. (I heard one bank predict a 1-year fixed rate of 1.75% by April 2021 in the last few weeks.) Never has it been made clearer than when Adrian Orr, Governor of the Reserve Bank, announced in early November that they were in effect going to offer “cheap money” to the banks to ensure rates continued to drop.
On the surface that seems like an astounding thing for the Reserve Bank to do, given the runaway housing market at the moment. The Reserve Bank reminded the country that their primary concern (rightly or wrongly) is to keep inflation and unemployment within certain acceptable bands, hence the need to stimulate the economy … house prices be damned! (Or they would argue the issue is actually a supply side problem that needs Government policy to resolve.)
So, what should you do with your home loans?
It would be difficult to argue anything rather than put most of your home loan on the 1-year rate. I would add my regular two addendums to this:
1) If you are refixing and you can afford the current payments, then strongly consider keeping the payments the same. There will never be a better time to make a significant difference to the length of your loan (and to how much interest you will pay in total) than when you refix at a lower rate than you are currently paying.
2) If you have a surplus in your weekly budget, have a conversation with your adviser as to the best way to use this to reduce your debt. Options range from increasing your fixed payments to setting up revolving credit or offset accounts with part of your home loan.
Back to why I argue for fixing for 1-year:
a) If the 6-month rate was competitive you would probably fix for six months, but most banks simply aren’t pricing this competitively. You will in all likelihood be better off fixing for a year and then refixing in a years’ time at a lower rate than now.
b) Let’s assume the 1- and 2-year rates are the same. If you fix for a year, you are likely to be able to fix in a year’s time for a cheaper rate than now. One year at 2.39% and one year at 2.00% is better than two years at 2.39%.
c) In a year’s time you will have the option of re-fixing for another year, or, at that stage, fixing for a longer time while rates are still low or likely even lower than now.
Because the future is uncertain, some may disagree and argue you should take advantage of the low rates and lock them in for longer while you can, which is a fair argument. And, of course, my above recommendation assumes rates are going to drop and I am reminded in March the same experts were predicting house prices to drop by 15%!
A final piece of advice
Banks are making it easier and easier to click a button on your phone app to refix a new rate in. Here at Velocity Financial, we are all for convenience but we would encourage you to have at least a quick check in with your mortgage adviser to ensure you are making the most of your situation and have thought through your strategy.
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.