Low interest rates make fixing long term more attractive

With interest rates so low and the NZ economy bouncing back, some are suggesting fixing your mortgage for 3-5 years.

23 June 2020

With longer fixed term mortgage rates available from 2.79% for three year terms, 2.99% for five years and floating rates down as low as 3.40% – while parts of the global economy bounce back better than expected – some market commentators are suggesting that homeowners should be thinking about fixing longer term.

Home owners commonly fix their home loans at interest rates for one to two years, but these extraordinarily low interest rate conditions across the board are making longer term loans something to think about.

Independent economist, Tony Alexander says the chance of negative interest rates has declined substantially in light of a better than expected outlook for the New Zealand economy after the early exit from Alert Level 2 and improving economic data coming from offshore.

“There’s nothing to suggest that anyone fixing for just one to two years is going to face substantially higher interest rates when their term comes to an end,” he says.

“But there’s limited scope for further falls in the five year rate and this is representing an opportunity for those who are conservative in their interest rate risk management,” he adds.

Kelvin Davidson, senior economist at Core Logic, stresses that it comes down to your personal circumstances as to what term you fix your home loan at. If it’s possible you’ll move in the next couple of years, you wouldn’t want to commit to such a long term rate.

Another reason not to fix longer term is if you’re expecting a bonus or you’re managing to make some good savings and you want to pay off some of the mortgage. There are limits to the number of extra payments you can make to your mortgage with a fixed home loan and then you have to pay charges.

Mortgaged Kiwis have a raft of home loan options

The beauty about the current low interest environment is that actual interest rates are so low homeowners have got a “smorgasbord of options,” when choosing their rate and term, says Mr Davidson.

“If you want certainty as a first home buyer you can fix, if you want to play the market, you can do that, and you can go floating without worrying about rates rising,” he says.

Independent economist, Cameron Bagrie adds, “You are basically paying nothing for certainty, which on the face of it is great provided that low interest rates are not going to drop further, and we are close to that point.”

But first talk to your mortgage adviser

Before you make any decision, it’s important to talk to your mortgage adviser about what would work for you. Mortgage advisers are free to consumers, so it’s a good idea to use one who can drill down into your circumstances and negotiate with multiple banks for a great rate on your behalf.

Loan Market’s Tracey Warner, who stresses that people have to have 20% equity or a deposit to be eligible for these competitive home loan interest rates, says: “You have to look at your position, not in the short term but long term. Ask: “Where do I see myself in five years?”

If you’re thinking of moving in three years, you shouldn’t be looking at a five year rate.

A longer term fixed rate may look attractive but you don’t want to be lumbered with huge break fees if something changes in your life, Ms Warner stresses.

“You might end up going overseas with a promotion to Australia, and you don’t want to own a rental so you have to sell and break the fixed term loan,” she says.

Longer term fixed rate loans suit investors

The adviser has put some of her property investors on three to five year fixed rates recently.

“The reason is they want certainty of knowing what the repayments will be,” she says.

“If you’re a property investor, you want to protect your yield because the biggest cost to an investor is interest so for them to be able to keep their rent payments down for tenants, it’s actually quite a sensible option if you’re looking to hold onto it,” she adds.

Mortgage advisers will sometimes suggest breaking the loan up into three tiers, spread over one, two and three year terms to diversify interest costs. This is about allowing for change in the marketplace but with the way interest rates are, there’s not a lot of benefit to tier it with the risk being so low that interest rates will rise, says Ms Warner.

Don’t just be led by the cheapest rate

To home owners and buyers, dizzy with the options out there right now, Geoff Bawden of Bawden Consulting advises against looking at only the numbers.

“Always match this with your circumstances, don’t chase the cheapest rate,” he warns.

People often focus on the rate rather than the purpose of the loan and the two don’t necessarily go together, he says.

When you go for a low fixed rate you are doing it because it’s a good deal and because you want a piece of it. The purpose of a three year loan would be stability and knowing what you can budget to which is particularly useful for first home buyers, he says.

“If you fix it for 12 months, it’s gone in a rocket,” he adds.