Fixed vs Floating
By Brendon Ojala
Your fixed rate is rolling off. What do you do now? Float? Fix it again? And for how long? Here are some thoughts ...
Deciding how to fix your home loans can feel like a guessing game. And in some ways, it is! There are risks and potential rewards to any strategy, so let's think those through.
In the current market I think there are two distinct, but sensible strategies. Before I tell you these, let me say two other things...
1) Your new rate will likely be lower than your previous one. Therefore, if you can afford your current payment, keep the payment the same. It will have a big impact on how long you will have a mortgage for.
2) Everyone is different. Your best mortgage strategy will be different than my best mortgage strategy. So, it can really pay off to understand your unique situation by talking it through with someone (someone who isn't just your neighbour’s mate’s hairdresser who once had an investment property so knows what he is talking about!).
So, back to the two sensible, defendable strategies that I believe make most sense for most people in the current market.
1) Keep fixing short. Despite some building inflation pressure, it seems (based on Reserve Bank and economist predictions) we have a good year or so of low rates still to come. The signals from the Reserve Bank are that they are keen to keep the OfficialCash Rate on hold for a while yet, and there is still a "Reserve Bank lending stimulus package" to banks allowing these banks the ability to pass these funds on to their clients. These things have the most impact on the shorter-term fixed rates.
Given there is currently around a 1% difference between a 1-year and 5-year fixed rate, a strategy of fixing for one year for the next five years is likely to result in an average interest rate over that time of less than the current 5-year rate. Rates would have to climb steeply in year three, four and five for this not to be the case.
2) Bank some predictability. There is currently some upward pressure on the longer 4- and 5-year rates. These interest rates are more impacted by overseas trends, inflation and interest rates. So, if you want a long-term rate in the low 3s, now may be the time to achieve that. Yep, you will be paying more than the 1-year rate, but you will know what your payments are for five years, and for some people that is super important. I think this is a defendable position. Be warned though, this is a long time to have a loan fixed for, and you do lose flexibility and options if you have all of your home loan on these longer rates.
My personal opinion is that the rates in the middle (i.e. 2- and 3-years) give you the chance to get the worst of both worlds. A higher current rate and when these roll off, likely to have an even higher rate.
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. A disclosure statement is available upon request.