Things to think about when fixing your mortgage interest rate!

Once the rate locked in, it cannot be changed!

Sometimes, it can feel like a gamble to refix your mortgage. Should you fix long, or is a short-term rate better, and what about floating?

The reality is that the best term for you will depend on a mixture of the current market conditions and your personal financial situation.

Locking in for too long could mean you end up paying more interest if the rates drop. But fixing too short may leave you vulnerable to sudden rate increases.

Here’s what to consider when deciding what loan structure maybe best for you.

 Should You Fix Short or Long Term?

There are a number of things that can cause interest rates to fluctuate. Inflation, OCR movements, global influences, and economic status are all factors.

Paying attention to these factors can help you to decide the right rate term for you. Here is some general advice on understanding when each term is a good option.

When a Long-Term Fixed Rate Might Be Right

Fixing for a period of 3-5 years can be beneficial when:

• Interest rates are expected to rise: If continuous rate increases are on the cards, fixing for a longer-term lock in a lower rate before the hikes occur.

• The Reserve Bank is tightening monetary policy: When inflation is high, the Reserve Bank often raises the OCR (which we saw during the COVID aftermath) which pushes mortgage rates up.

• You prefer certainty and stability: When you lock in a longer-term rate, you know exactly what your repayments will be for that fixed term. It’s great for budgeting and you won’t be surprised by an unexpected rate increase.

When a Short-Term Fixed Rate Might Be Right

Choosing a shorter fixed term of 6 months to 2 years can be beneficial when:

• Rates are expected to decrease: If economic conditions suggest interest rates could fall, fixing for a shorter period lets you take advantage of lower rates sooner.

• The Reserve Bank is loosening monetary policy: When inflation is tamed and economic growth slows, the OCR may be reduced to encourage borrowing and investment, this impacts interest rates and often brings them lower.

• You want flexibility: Shorter term rates allow you to capitalise on changes in the market quicker. They are also great to avoid break fees if you intend to sell your property soon. 

Personal Factors to Consider

While market trends and external factors play a role in choosing which rate is best, considering your own financial situation and goals is just as important.

Here is what you should be thinking about before locking in a rate:

• Income Stability: If you have a stable, secure income, you may be comfortable taking a shorter fixed term to potentially benefit from lower rates in the future. But, if your income is less predictable, fixing for a longer term can offer peace of mind with consistent repayments.

• Future Goals: If you are planning to upgrade, downsize, or move in the next few years then a long-term fixed rate might not be ideal. If you plan to sell your home soon, breaking a fixed loan early can come with costly penalties. However, if you plan to stay put for a while, a longer-term rate might work in your favour.

• Risk Tolerance: Does the thought of rising interest rates stress you out? Then, a longer fixed term may help you sleep better at night. Yet, if you are comfortable with a bit of risk and want to keep your options open, a shorter term may suit you better.

• Repayment Flexibility: Extra repayments can shorten the term of your loan and reduce the overall interest you pay, but some fixed rate mortgages limit the amount of extra repayments you can make. Consider this when locking in. You may also want to split your loan – fixing part of it for stability while keeping some on a shorter fixed term or a floating rate for extra repayment flexibility.

What Should You Fix for Now?

During the last half of 2024 my advice was to float, or to choose really short terms, like six months to a year. Now, I am encouraging clients to think about locking in a longer-term fixed interest rate.

Inflation seems to have been tamed and the Reserve Bank can loosen monetary policy. But borrowers need to be careful as rates are highly unlikely to drop to the 2-3% region that we saw around COVID-times. The Reserve Bank has indicated that the OCR could drop another half percent by the end of the year. However, the international situation needs to be watched closely, a potential trade war has the capacity to raise global interest rates.

General advice is great to have, but it’s also really helpful to have specific advice based on exactly what the market is doing here and now and your personal circumstances. Contact me if you would like me to look at your situation and the current rates available to make a recommendation on the best solution for you.