Sweet spot
There’s a clear choice for borrowers keen to save on their home loan, writes Susan Edmunds.
To fix or to float? There’s a clear choice for borrowers keen to save on their home loan, economists say.
When Karl Leathley was thinking about refixing his mortgage recently, he turned to his mortgage broker for advice.
Retail interest rates have shifted up over recent months, despite a flat official cash rate.
Commentators have suggested it could be the start of a more sustained increase.
But when short-term rates are much cheaper than longer-term options, it is difficult to work out whether it is worth paying more now for long-term certainty.
One-year rates are available at a median 4.85 per cent, compared with 5.87 per cent for five years.
If your mortgage term is 20 years, that’s a difference of $3 a fortnight for every $100,000 you have borrowed.
Leathley took his broker’s advice to take a one-year fixed term, despite the risk that rates could be higher by the time it rolls off. ‘‘We are looking at doing bits and pieces on our home and he didn’t see the need for us to take anything long term. He said even if rates did increase in that time, it shouldn’t be by much.’’
According to economists, that was probably the best bet. They say a strategy of rolling short-term rates should provide the lowest interest bill at the moment.
Gareth Kiernan, chief forecaster at Infometrics, said oneand two-year terms seemed the best deals available.
‘‘If you are looking at longer terms than that, you’ve probably missed the boat, given the lift in those longer rates since late last year. I see HSBC is advertising 3.99 per cent for 18 months.’’
Nick Tuffley, chief economist at ASB, agreed shorter terms were the better way to go at present.
‘‘Purely by price, we see fixing for one year and repeatedly rolling on to a fresh one-year term as the slightly better option versus picking a long-term fixed rate ar present. Because the yield curve has steepened up so much over the past six months, the cost of certainty from fixing for longer terms is high.’’
ANZ economists said the oneyear rate was still cheapest.
‘‘Intensifying competition for deposits does risk another leg-up in mortgage rates given the importance of deposits as a source of funds, but this now looks to be factored into the term structure.
‘‘As such, in our view, one year remains the sweet spot for borrowers. However, longer terms do offer more certainty.’’
Its break-even analysis shows that the median one-year rate would have to have risen from 4.99 per cent now to 5.44 per cent in a year’s time to make it worth fixing for longer than a year now.
But Westpac said borrowers who wanted the certainty of a longer rate had a good opportunity at the moment, too.
‘‘These rates are most likely to be pressured higher by global market trends, so borrowers who prefer the security of a longer term still have a chance to lock in at historically quite low levels.
‘‘Floating mortgage rates usually work out to be more expensive for borrowers than short-term fixed rates such as the six-month rate. However, floating may still be the preferred option for those who require flexibility.’’