As opposed to that, mortgage rates that loosely follow the headline rate, have been very attractive. You can now lock in your home loan repayment for the next one year at just 3.79%. If you wish you can even lock in your repayments over the next 5 years at just 4.39% per annum.  

So, should you be fixing these rates considering they are so low, or should you not? The case for not locking in now is that the headline rates may go down even further. On the back of that, it’s possible mortgage rates could fall further. But is that certain?

There are a number of factors you should consider before you make a decision to fix, or otherwise.

Managing cashflows

Perhaps first and foremost relates to how much certainty you wish to have in terms of your cashflow to meet your regular loan repayment obligations. For some, being able to lock in a rate now means that there is certainty of cash outflow into the future.

The benefit is that it helps you better budget your income and expenditure around that amount. Depending on how much you value ‘certainty’ you can choose a timeframe that your are comfortable with. This could be over 6 months, 1 year, 2 years etc.

Instead, if the certainty of cash outflow is not of great concern to you, it is better to make a considered choice between fixing your mortgage rates versus otherwise.

Given floating mortgage rates offered by most banks are over 5.5%, there is still a sizeable margin over any of the fixed mortgage rate terms. For instance, on a loan amount of $500,000 someone on a floating rate of 5.65% would pay $28,250 in interest in the next one year. On the other hand, someone else on a fixed rate over the same time would be paying about $19,250 – a substantial difference of $9,000 in just a year. 

On the above basis, if you do decide to go for a fixed rate option, the next question is pretty obvious. How long should you fix it for? 

Spreading the bet

Recent indications, and the market commentary, indicates an emerging slowdown in the economy. Should that happen there is a potential that banks would follow suit in reducing mortgage rates. (There is always a ‘should’ with these types of forecasts).

On the other hand, proposed rule changes for banks may mean that they face higher costs for running their business. Should that get passed on to consumers that could mean that mortgage interest rates could rise. Under such heightened levels of uncertainty one option to consider is staggering the fixed rate periods.

Practically, this would mean that you split the loan outstanding into smaller portions. Then, fix each portion over different timeframes. For instance, you could lock in the 1, 2, 3 and 4 year loan rates by putting a $125,000 into each of the fixed terms. You still run the risk that in two years time the rates move lower. But, by then you would have at least some of your outstanding loan ready to be rolled over. At which stage you can benefit from the lower rates then.

You can apply this thinking in any number of ways. It is not necessary to have equal amounts in each timeframe. You could front load a majority of the loan amount to the short term. Or you could have only a smaller amount locked into a near term rate with the bulk of it locked in over a longer term.

Shop around for the best home loan mortgage rates here.

The post To fix your mortgage rate, or not, that’s the question appeared first on PocketWise.

Banks have been the ubiquitous provider of various financial services and products for centuries. They continue to be the go-to for most things financial – you need a home loan you go to your bank, you need a credit card you turn to your bank etc.

While technology has enabled a number of non-banks to start providing alternatives, by a significant majority the banks still command a massive user base. But, that doesn’t necessarily mean that this will continue to be the case. There is no debate that typically the banks user base is a very sticky one. Meaning, most of us can’t be bothered moving banks even when we may not be entirely happy with our experience dealing with them. But, given it’s your hard earned money, it may pay to wrestle for it!

Coping with bad behaviour

A recent review of New Zealand banks has highlighted a number of shortcomings within these long established institutions. Many of these issues have a direct impact on how we, as consumers, are served. Fair to say, Kiwis appear not to have been as hard done by as consumers in other countries – at least not at this stage. The sentiment towards banks in the US, UK and Australia for example are sharply far less trusting.

There is no one best solution to tackle the issues raised by the review. One obvious solution may be to regulate the banks more. That is to say, put more rules and constraints around what they are and are not, allowed to do. As obvious as it may sound, the solution could potentially have unintended consequences. Additionally, you and I as individuals may not be able to influence that decision much.

Vote with your dollars

But, you and I can influence behaviour, by refusing to accept bad behaviour. Practically what that would look like is to actively make decisions to shop around for alternatives if we are not treated fairly. Commercial threats such as losing a customer can be more effective in managing bank behaviour than the spectre of regulation (which typically benefit the legal fraternity and raise costs to consumers!).

On the other hand, when you actively decide to switch your bank you will most likely incur nil costs (except in some circumstances). Furthermore, you will likely end up with more cash back in your pocket as you identify deals from other banks when shopping around.

As an example, say you decide to take a $600,000 loan over 30 years. At a 4.5% interest rate you will pay about $495,000 in interest. Should you get an offer for the same loan at 4.2% elsewhere, you would end up paying only $456,000 in interest – that’s nearly $40,000 more in your pocket!

Now imagine you propose to the bank that you are going to take your business elsewhere. That’s a half a million dollar at stake for their business – enough incentive for forcing the best outcomes for yourselves.

We would love to hear what you think of your bank and your experiences with them. Click here to have your say and find out and see what others think.

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