Fixing mortgage interest rate, 2 or 3 years?

Forums › Home Workshop DIY › Fixing mortgage interest rate, 2 or 3 years?

1 | 2 | 3

1728 posts

Uber Geek

ID Verified

Trusted

#1202636 23-Dec-2014 13:34

With recent increases in RV's/buoyant property market has your property increased in value at all? (and yes, RV's don't equate to the selling price of a property, but they certainly help form an idea of possible value).

We purchased our property with less than 20% incurring an LVR fee. When our mortgage last came up for renewal we asked the bank to check what level of equity they believed we held now and thanks to the buoyant Christchurch housing market we'd jumped closer to the 50% mark (which is achievable in the current market for our property, we've had it indicated higher yet). This resulted in a much better offer from the bank which we were happy to accept with no low equity penalty.

khull

1245 posts

Uber Geek

#1202639 23-Dec-2014 13:42

lokhor: Not sure that I want to switch banks at this point, it seems very difficult with lawyer involvement etc and I also have a personal loan with my current bank.

If you have a personal loan higher than the 6.05 % @ 3 years rate you are considering then you must try to get rid of it along with any debt that by drawing on your mortgage when you decide to fix it. Leave your student loan at minimum repayment as that is 0% (assumption you are not skipping the country)

lokhor

2858 posts

Uber Geek

Trusted

#1202654 23-Dec-2014 14:19

khull:
lokhor: Not sure that I want to switch banks at this point, it seems very difficult with lawyer involvement etc and I also have a personal loan with my current bank.

If you have a personal loan higher than the 6.05 % @ 3 years rate you are considering then you must try to get rid of it along with any debt that by drawing on your mortgage when you decide to fix it. Leave your student loan at minimum repayment as that is 0% (assumption you are not skipping the country)

Without enough equity they don't let you put additional other debt onto the mortgage.

All comments are my own opinion, and not that of my employer unless explicitly stated.

lokhor

2858 posts

Uber Geek

Trusted

#1202674 23-Dec-2014 14:36

lxsw20: How long until you're over 20%?

A long time. Currently not paying a huge amount into it until my student loan is paid off and I clear some other debt.

All comments are my own opinion, and not that of my employer unless explicitly stated.

berry

61 posts

Master Geek

#1202698 23-Dec-2014 15:10

frankv:

If you go with 5.85%, then over 3 years you will pay 5.85*2 + X*1 (where X is the unknown floating/fixed rate you'll pay in your 3rd year), otherwise you'll pay 6.05 *3
i.e. 11.70+X vs 18.15
i.e. if you think X will be less than 6.45%, you should go for the 5.85 for 2 years. If you think X will be over 6.45%, you should go with the 3 year term.

This is only ballpark, because X will only apply to the principal owing in the third year, whereas the other rates apply over the amount owing during the first 2 years.

You can be sure the bank has already done this calculation, and *they* think it will be about 6.45%, otherwise they would have given you different options. Can you outguess the bank on this? I think probably not.

You might consider a couple of other aspects though...

if interest rates were up at (say) 12% in 2 years time, how bad would that be for you? And how likely is it? Is it worth paying a bit more interest now as insurance against being trapped by that?
Conversely, if you fixed at 5.85%, would you pay off principal faster for the next 2 years, and therefore be better off, even if the interest rate goes over 6.45% in the 3rd year?
Or are you desperately short of cash right now, but expect to have a higher income in 2 years? In which case a short-term reduction in payments might be worth it.
Or maybe right now you're dinkies, but there's a risk you might have be a single-income family in 2 years time?
If you're uncertain, maybe you should go on the floating rate until you know what you want to do?

This is pretty much my approach to this sort of problem. I would then compare your 6.45% to the 5 year rates being offered... My theory being the 5 year rates are not too far off the banks guess at the average over the next 5 years.
I also personally find it hard to know what my situation will be like more than 2yrs ahead at this point in my life :)

My suggestion would be to fix at the lower (2yr) rate but since you can afford the 3 yr rate then increase your minimum payments to what the 3 yr amount would be - it will probably take a year (or more) off your term and if the rates are higher than you have predicted in 2yrs time you will have at least paid off some extra principal.

driller2000

935 posts

Ultimate Geek

ID Verified

#1202715 23-Dec-2014 15:26

we recently fixed one of our mortgages pieces (we have it split ie. 2 x fixed pieces and 1 x floating piece) for 3 years at 5.99% - which was competitive at the time.

must admit i don't fuss over the difference in rate too much when it comes to 2 vs. 3 yr terms - as long as it's competitive (see interest.co.nz)

for me it's all about paying as much as we can, as soon as we can - as the 0.2% difference in rate over the 2 vs. 3 yr term makes naff all difference compared to killing the mortgage in say 10 years (or less) as opposed to it dragging on for 20+ years.

so our strategy is to pay down the floating piece as quickly as we can using a revolving credit facility (which requires discipline not to redraw / inc your lending) and as the fixed pieces come up for renewal, and where finances allow - to transfer some of the fixed mortgage onto the floating mortgage to allow it to paid down quicker without penalty or restrictions.

anyhoo.... good luck with your decision :)

ps: i have found tony alexanders updates useful for trying to get some guidance re lending and the economy in general (nz and internationally) - as i have found it useful to have a broader context when making decisions like the one you are about to.

mentalinc

3229 posts

Uber Geek

Trusted

#1202726 23-Dec-2014 15:28

lokhor:
lxsw20: How long until you're over 20%?

A long time. Currently not paying a huge amount into it until my student loan is paid off and I clear some other debt.

You should only be paying the minimum off your student loan (unless you plan to go overseas).

There is no point in paying off your student loan quickly. Stop paying anything extra put it toward your personal loan (which you should move to your mortgage) and mortgage.

CPU: AMD 5900x | RAM: GSKILL Trident Z Neo RGB F4-3600C16D-32GTZNC-32-GB | MB: Asus X570-E | GFX: EVGA FTW3 Ultra RTX 3080Ti| Monitor: LG 27GL850-B 2560x1440

Quic: https://account.quic.nz/refer/473833 R473833EQKIBX

Equinox IT

Cloud spending continues to surge globally, but most organisations haven’t made the changes necessary to maximise the value and cost-efficiency benefits of their cloud investments. Download the whitepaper From Overspend to Advantage now.

Batman

Mad Scientist
29761 posts

Uber Geek

Trusted

Lifetime subscriber

#1202733 23-Dec-2014 15:48

fix at the lowest. they've been saying interest rates will go up since 2007.

lxsw20

3552 posts

Uber Geek

Subscriber

#1202757 23-Dec-2014 16:48

mentalinc:
lokhor:
lxsw20: How long until you're over 20%?

A long time. Currently not paying a huge amount into it until my student loan is paid off and I clear some other debt.

You should only be paying the minimum off your student loan (unless you plan to go overseas).

There is no point in paying off your student loan quickly. Stop paying anything extra put it toward your personal loan (which you should move to your mortgage) and mortgage.

Exactly, interest bearing loans come first.

Item

1717 posts

Uber Geek

Subscriber

#1202772 23-Dec-2014 16:58

PoHq: We actually just fixed for 5 years at 6.5 percent. Quite an increase from the 5 percent we were on for 2 years. My broker said obviously nobody knows what's going to happen but everything indicates rates are going to increase. He also gave me another good way of looking at it. The average rate for your mortgage over 20/25 years is 7 percent. Even if rates go down and you end up stuck on 6.5 percent with the 5 percent you had for 2 years your average is around 5.93 for 7 years which is pretty good.

Wow - we just got ours fixed for 5.99 over 5 years with ASB - though we split off $50k on a variable so we could "top-up" against it without incurring penalties.

Up until then we had been on a 5.25% for the first 24 months of our ownership.

Fortunately, although we originally were on a 5% deposit, our RV & house value went up to the point where we actually have 20% in equity, which may have been a factor on the rate we got along with the $50k variable

jonherries

1395 posts

Uber Geek

Trusted

Subscriber

#1203048 24-Dec-2014 09:01

I like the thought of out-thinking the bank, but realise they hire some pretty smart people.

What I have read seems to suggest that you might out do them on occasion, but over the longer term the bank will win.

Thats funny I wrote that and instantly thought of a casino.

Back to guessing on interest rates. Things which need to be considered are what is happening in Europe, what is happening in China, the US, and with dairy prices and logs. Also fuel is an interesting one with OPEC standing by their current production levels and the consequent slide in the CPB. Also worth knowing is how much rebuilding remains in Chch.

Pick what is happening with all those correctly and you will beat the bank.

Jon

timmmay

20578 posts

Uber Geek

Trusted

Lifetime subscriber

#1203058 24-Dec-2014 09:21

I read a story in the past 24 hours saying PwC thought the banks would be doing good deals on fixed term mortgages in the new year. Can't find it now though.

andar

67 posts

Master Geek

#1203083 24-Dec-2014 10:32

timmmay: I read a story in the past 24 hours saying PwC thought the banks would be doing good deals on fixed term mortgages in the new year. Can't find it now though.

http://www.stuff.co.nz/business/money/64435834/new-year-mortgage-war-tipped

Batman

Mad Scientist
29761 posts

Uber Geek

Trusted

Lifetime subscriber

#1215233 15-Jan-2015 07:10

joker97: fix at the lowest. they've been saying interest rates will go up since 2007.

gone down again

heylinb4nz

656 posts

Ultimate Geek
Inactive user

#1215331 15-Jan-2015 10:31

I find fixing for 2 years works well if you are a saver. At the end of the 2 years you can make a lump payment before re-fixing.

Another thing while floating rates are low is to use a Flexi \ Overdraft account to make a bulk payment.

is say you have a $15,000 O\D, make a $10,000 payment to your mortgage and fix it for 2 years. Meanwhile you pay back your Flexi account (ie all wages go into flexi) expenses go onto credit card, flexi pays for credit card.

Handy to have it for emergency funds as well.

Overall you save on interest as

a) your mortgage principal is lower
b) your wages bolster up your flexi which is on floating rate
c) your credit card holds interest free for 4 weeks, leaving maximum funds in Flexi

At the end of 2 years you find your Flexi has been paid off, perhaps even have savings (positive cashflow).

Repeat process until mortgage is paid, or low enough that you can float the remainder

1 | 2 | 3