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If you have been paying attention (assuming of course you have been reading this blog for a while), you may have noticed that I have been suggesting that fixing your home loan for around 18 months has been the “sweet spot” for many months now. Well, it is a new year, and a new recommendation is coming up. (Realizing of course that this is still general information and if you want some individual advice, we need to talk first! Spot the adviser disclaimer below!)
Late last year, the figures showed that inflation had peaked and had started to reduce. With the peak of inflation, the “mainstream messaging” was that interest rates have now peaked. We were being told that rates would start to drop in late 2025. Since then, inflation continues to drop (check the quarterly figures out today showing quarterly inflation at 0.5% and annual inflation at about 4.75%). The international wholesale interest rates have dropped by 0.5% to 1%, and anecdotally the economy is doing it pretty tough - particularly retail and hospitality sectors. If you believe the politicians, the size and spend of the government may also shrink.
All these factors would indicate the next move in home loan interest rates will be downwards. There has already been some downward movement in the 2-5-year fixed home loan rates in the last few weeks. The Reserve Bank has been “talking tough” regarding the risk of inflation rising, and they are doing this in the desire to keep interest rates as they are until they are sure inflation is under control, i.e., later in 2025.
So, what do you do when picking a fixed interest rate (realizing that you potentially should not ‘fix’ all your mortgage but keep some on a form of floating rate as part of your debt reduction strategy - but that is another conversation)?
If you have fixed rates rolling off in late 2025 or early 2026, then there is a good chance that when you next fix, they will be lower than they are now. It can be advisable to keep some of your mortgage on a floating rate as part of your debt reduction strategy. However, if you want individual advice, we need to talk first.
You may have noticed that the 6-month and 1-year rates are pretty close. (They are the same at some banks but around a 0.25% difference at others.) Given this and the mainstream thinking that rates will not go higher, you may want to consider fixing your loan for 6 months. If in 6 months’ time, rates are the same, then fix for another 6 months and you haven’t lost out (well maybe that 0.25% difference compared to fixing for 1 year). If rates drop a little quicker than the Reserve Bank is forecasting - and let’s not rule this out given my previous comments - then there is a chance that you might be able to refix for a lower rate in 6 months’ time. In this case, you are better off. The risk here is that rates actually rise, and you are faced with a higher rate in 6 months’ time. All I would say about that is currently ALL the signs are NOT pointing to this occurring.
So, there you go, perhaps you consider fixing your home loans for 6 months.
Kiwis typically pick the cheapest rate to fix their home loan for. Historically that was the 1 year. In the last year or so (and right now) it is the 5-year rate, which is around 0.5% cheaper than the 1-year fixed rate. In fact, right now the 6-month rate is the most expensive fixed rate closely followed by the 1-year rate.
However, right now, if you pick the cheapest rate in the current environment, I think there is a very good chance that, well within 2 years, you will be on a higher rate than you would be had you picked a shorter rate.
As always, everyone’s situation and tolerance to risk is unique, and your specific financial situation needs to be considered before any individual advice can be given.
Do talk to your adviser about the strategy that is right for you. But hang in there, it seems that cheaper rates are just around the corner for us all…
Brendon.
About Brendon: Hi, I'm Brendon, one of the owners and advisers at Velocity Financial. I have been giving advice on mortgages and insurances at Velocity for around 15 years, and it is great to be able to work with people to achieve their financial goals. Prior to giving money advice, I worked as a youth worker and managed teams for a not-for-profit organisation. I live with my wife and one of my sons (the other one only stays when he needs food) in Berhampore, and if I'm not talking revolving credit accounts, I can be found running the trails of Wellington.
Disclaimer: Brendon Ojala (FSP119244) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Brendon’s disclosure statement on our website.
Always get professional advice
The information shared in this post is meant to be general guide to support you on your journey. When making important decisions about your finances, we encourage you to seek independent financial advice first, tailored to your unique situation. As well as talking with a financial adviser, make sure you talk to your lawyer and accountant too – together they'll help you find the best solution for your specific situation. Our knowledgeable financial advisers are here to help. Check out our website for the details about our financial advisory services in our disclosures https://www.velocityfinancial.co.nz/disclosure-statement.