In the ever-changing landscape of home loans, borrowers will at some point be asking themselves the eternal question: to fix or not to fix and if fix then for how long. The choice between short-term or long-term fixed rates needs careful thought. So, we asked Aseem Agarwal, Head of Mortgages at Global Finance for some insights and real-life examples to help shed some light on this dilemma.
Understanding the basics: Repayments and interest rates
Aseem begins by advising borrowers to calculate repayments at different interest rates and terms and aligning them with their budget and financial capacity. “Every borrower should consider what is most appropriate or affordable for them.” He recommends a close examination of income, expenses, future financial goals, and risk tolerance.
What they are saying
Keeping a watchful eye on various sources, such as news articles, economists’ predictions, and updates from the Reserve Bank OCR (Official Cash Rate) was something else Aseem advised. Borrowers, he tells us, should try to form a picture of market dynamics by reading and listening to a range of perspectives and opinions. The different viewpoints and forecasts espoused by financial experts will help borrowers develop an understanding of trends, and the factors influencing interest rates. They will then be in a better position to make an informed choice.
Timing the market: Short-term vs. long-term
Not unexpectedly, Assem advises to fix for the short term (e.g., 6 to 12 months) when interest rates are expected to go down. If you are expecting windfalls in the form of a big bonus, commission, inheritance, money from the sale of a property or asset, or increases in your regular income within a certain timeframe, then perhaps you may also want to fix your mortgage for a shorter duration or may be part of the loan can go on floating/ revolving so that you can park your short term savings in that loan and reduce it as well as save interest too. That way you can avoid having to pay any break costs if you put this money toward your home loan.
Conversely, he advises long-term fixes (e.g., 2 to 5 years) for stability in the face of anticipated interest rate hikes. Aseem uses the example of the interest rate cycle in September 2021 to illustrate the impact of market timing on choosing the right terms.
“An example is when interest rates started increasing in September 2021, and the five-year rate was 3%. In hindsight, it would have been better to have fixed a mortgage for five years. But in today’s market, where we feel that interest rates have peaked, perhaps five years is not the right length of time to fix for”.
Matching property plans
Another factor he said borrowers should take into account is the planned holding period for the property. If you’re planning to stay in an owner-occupied property and not move for the next 5 or 7 years, it may be best to opt for a longer-term fix provided interest rates are likely to go up. On the other hand, if you are borrowing for an investment property and plan to sell it in the next six months to two years, then you may want your mortgage expiry to coincide with your plans to sell the property.
Hedging risk: Staggered approaches and fixed-float combinations
Hedging risk, Aseem explains, is where borrowers divvy up their loans into different fixed-term packages. This way they can mitigate the full impact of interest rate fluctuations. It provides a safety net in uncertain market conditions.
How much to fix and how much to float can depend on what your cash flow looks like.
“Sometimes when I’m chatting with a borrower, they may tell me they are expecting some money. I’ll ask when, because if it’s in less than six months, then it would make sense to have either all or part of their mortgage floating as the minimum fixed rate term is six months. Whereas if they tell me they expect the funds in the next 8 or 9 months, then I’ll suggest they fix a portion for six months and then leave it floating for 2 or 3 months. That way they don’t have to pay a break cost when the funds do arrive in the eighth or the ninth month”.
Peering into the crystal ball: Rate predictions
While Aseem acknowledges the unpredictability of interest rates, he advises borrowers to seek advice from mortgage brokers or any other financial advisers who are competent and having expertise especially during times of economic uncertainty. If you’re facing the possibility of lowering interest rates or trying to wrap your head around the complexities of fixing a home loan, the team at Global Finance can provide tailored solutions.
Our team will help you understand your options. We’ll help you evaluate the short-term costs against the medium-term odds so you can make informed decisions that align with your financial goals.
Global Finance does have a Mortgage Genius Plan which can help you to save interest on your mortgage depending upon your capacity but without increasing your loan instalment.
Whether you choose a fixed rate, floating rate or a combination of the two, our experts will help make sure your mortgage performs at its best. Contact us to talk about your mortgage today on 09 2555500 or info@globalfinance.co.nz
The information and articles published are true to the best of the Global Finance Services Ltd knowledge. Since the information provided in this blog is of general nature and is not intended to be personalized financial advice. We encourage you to seek Financial advice which is personalized depending on your needs, goals, and circumstances before making any financial decision. No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or its employees liable.