The worries of skyrocketing mortgage rates are over – for now anyway, with a rate of 5.99% across the 3-, 4- or 5-year terms at one of the major banks, it’s now the cheapest fixed rate available.
Despite the Reserve Bank of New Zealand’s best efforts to increase the OCR by 0.50% (to 5.25%), the outcome has been a minor increase in the short-term interest rates and a reduction in the long-term interest rates.
Since the interest rate tightening, the inflation-fighting cycle has begun. The OCR has increased by 5.00% and the 5-year rate has increased by 3.00%.
One would expect it to follow a similar trajectory rising almost as much, however, fixed-rate mortgages are always ‘forward looking’.
The market is not predicting interest rates to stay high forever, if they did, the 5-year rate would look more like 6.99% or 7.99%!
So is this a bargain?
Maybe.
Maybe not.
What fixing for 3, 4, or 5 years does is offer you the security that is what you pay for that duration of time. It gives you certainty, and if that means you don’t need to worry about where interest rates might be headed, then incorporating a longer-term fix has its obvious benefits.
Imagine a scenario where inflation is no longer a problem, interest rates may eventually fall down further and if you had fixed for 5 years and you want to get the even lower rate there may be a break fee.
The problem is, we cannot ever say with certainty where the mortgage rates are going to be. If the market was a better predictor of the future we wouldn’t have such wild shifts in interest rates and they would be more stable.
Therefore, managing your interest rate risk by splitting your loans across a range of interest rates is a strategy to better manage this risk. If you have some lending coming up for renewal within the next 2 years, why not take a 3+ year loan for the next renewal to split that risk up? Likewise, if you’ve already fixed for a long time, perhaps the slightly more expensive 1-2 year rate may be the better choice.
What is exciting is that that ominous grey cloud of interest rates skyrocketing has appeared to have passed and borrowers now have the option to have security for longer.
For existing clients, expect us to reach out 60 days before your loan renewal to discuss your next renewal.
Otherwise, for those who are yet to be clients, feel free to reach out to our advisers to give you guidance on your next decision.
