Fixer upper
As interest rates rise, Susan Edmunds looks at what borrowers need to think about before fixing their mortgage.
What’s the best rate?
Price isn’t everything, but it helps to get the best one you can. At the moment, that might mean taking a short-term mortgage rate.
ASB economist Kim Mundy said the one- and two-year rates were still the cheapest at most banks and about 0.8 of a percentage point below the floating rate. By contrast, the fourand five-year fixes, while still well below the 10-year average, are higher than the floating rate.
ANZ economists agreed oneyear rates seemed the most compelling. ‘‘The mortgage curve remains tick-shaped, with the oneyear rate the low point, and in our view, the sweet spot,’’ they said.
‘‘Although we expect the Reserve Bank’s next [official cash rate] move to be a hike, and see mortgage rates on a gradually upward trajectory over coming years, this is already factored into the term structure, and we question the economic value of fixing for longer than one year, given the increased cost.’’
Some borrowers might worry about rates rising, but the economists said a series of oneyear fixes would probably work out cheaper in the long run.
‘‘You’d need to see the one-year rate rise a further 1 per cent, from 5.06 per cent to 6.06 per cent, over the next two years for three backto-back one-year terms to be more expensive than fixing for three years now.’’
It was also worth looking for specials, Mundy said – owneroccupiers with at least 20 per cent equity and investors with 40 per cent are often eligible for better rates. If you see a good rate on offer from another bank, you could ask your bank to match it.
How will rates move?
Whether it is worth fixing for longer may depend on what you think the likely future direction for interest rates is.
Infometrics expects floating rates to be 5.78 per cent next March and 6.28 per cent the following year.
For two-year terms, they expected 5.3 per cent next March and 5.74 per cent in 2019, and for five-year terms, 6.46 per cent next March and 6.85 per cent in 2019.
Mundy said the official cash rate was likely to stay on hold until late next year and short-term fixed rates were unlikely to drop any further this year.
Extra costs the banks were facing in getting funding could mean some modest pressure on short-term rates to rise, she said.
Over the longer terms, increases were likely to be more pronounced.
‘‘While US interest rates have eased from their post-election highs given the tax reform delays, the US Federal Reserve is expected to continue to lift US interest rates,’’ Mundy said.
‘‘As a result, we expect US interest rates to generally trend higher, and as a result, anticipate further upward movement over time in New Zealand’s three- to five-year fixed mortgage rates.’’
Will you pay off a lump sum or sell in future?
If you think there may be change ahead, whether that’s because you might want to move house, or you could have the opportunity to put a chunk of money on the mortgage, it makes sense not to fix for too long.
Banks generally charge a break fee if you want to pay off a loan while it is on a fixed term.
While you may be able to substitute the security on your loan to buy a new house, that only helps if you are moving to somewhere where you need the same size loan, or a bigger one.
What is your capacity to deal with a rate rise?
Short-term rates might be the cheapest, but if you know your budget could not handle an increase in interest rates, you might think it is worth locking in a rate for certainty.
Mundy said a five-year rate was a long-term hedge in case interest rates rose substantially.
‘‘On top of trying to minimise interest payments, a good mortgage strategy also needs to take into account an individual borrower’s cashflows, tolerance for uncertainty, and the ability to deal with changes . . . as interest rates change. Borrowers’ financial circumstances can change too, and this needs to be taken into account.’’
But she said it was 120 basis points higher than the one-year rate and it was likely that fixing for three- or four-year terms would provide a lower cost of funds over the next five years.
What other support can your bank offer you?
As well as what the bank will charge you, consider what other benefits it offers.
Does it have a good mobile app or access to financial advice to help you meet your goals?
If you’re in business or a property investor, whether the bank is willing to provide other types of loans you might need in future might be an important consideration.
Refixing your mortgage is a good time to check that it is structured in a way that helps you pay it off as fast as possible.
Ask your bank whether a revolving credit or offset facility is right for you.
‘‘Splitting the mortgage into different terms, or a mix of fixed and floating mortgages, are strategies for keeping some flexibility while locking in some interest rate certainty,’’ Mundy said.