Fixing mortgage interest rate, 2 or 3 years?

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lokhor

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#160093 23-Dec-2014 11:45

My 2 years fixed interest rate of 5.25% is about to expire at the end of January so I need to start thinking about what I want to do.

I have contacted my mortgage broker and he has come back with two options I am considering:
5.85 for 2 years
6.05 for 3 years

I am not sure which one to go with.

I know that these rates are not as competitive as some others available but I am not switching for various other reasons so these are the only options I am considering.

Any advice would be welcome.

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

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#1202580 23-Dec-2014 11:58

Depending on your loan amount "not switching for various other reasons" is quite disturbing.

A 25 basis point different makes a huge difference over the life of the loan.

Having said that if you can't decide then just split the loan up into fixed/floating (or fixed with differing terms)

lokhor

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#1202582 23-Dec-2014 12:02

I think there will be additional fees for splitting it but I will ask.

The reasons are mainly around additional cost, we don't have 20% equity so can't easily switch banks and will incur an LVR fee.

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

khull

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#1202587 23-Dec-2014 12:09

A broker might help you with the LVR restrictions - there are no fees associated with the services.

Also you'd be surprised what other banks might end up paying to get your business. Last switch made not only were the lawyer fees paid up with spare change towards my floating mortgage, I ended up with a lower rate. They even paid the penalty fees to break the fixed loan

MileHighKiwi

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#1202594 23-Dec-2014 12:14

We just re fixed with BNZ; 3 years 5.85%. Pretty happy with that, had previously been 5.75 for the last 2. Added about $8 PW to the mortgage.

lokhor

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#1202603 23-Dec-2014 12:24

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.

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PoHq

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#1202604 23-Dec-2014 12:28

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.

lokhor

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#1202607 23-Dec-2014 12:33

Oh so yeah 60 Months (5 years) rate would be 6.30% but I wasn't really considering it. maybe I should.

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frankv

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#1202610 23-Dec-2014 12:39

lokhor: My 2 years fixed interest rate of 5.25% is about to expire at the end of January so I need to start thinking about what I want to do.

I have contacted my mortgage broker and he has come back with two options I am considering:
5.85 for 2 years
6.05 for 3 years

I am not sure which one to go with.

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?

MagicSquirrel

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#1202611 23-Dec-2014 12:40

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.

Quite brave to fix to that.
We are currently floating on 6.3 and keeping it that way for few months at least. Inflation at 1% and exports doing not that well is adding pressure on lowering rates.
Did the broker say why he expects rates to go up??

PoHq

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#1202615 23-Dec-2014 12:46

I don't think you'd get any broker to give you an actual figure he thinks it might rise or fall to. Yes it was a big decision stick for that long but as I say we will look at it at a 7 year average. As someone above mentioned you can see the extra money you are paying now as an insurance policy to protect you against huge increase in the next five years. It mainly comes down to what you can and can't afford.

lokhor

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#1202617 23-Dec-2014 12:50

Well, my student loan will be paid off in just under 3 years so I will have around $8000/year or $680/month more at that point so makes sense perhaps to target around that. I have done some calculations based on the mortgage amount as well.

Here's the monthly amount based on rates
Current: 1491
2 year rate: 1592
3 year rate: 1625
4 year rate: 1633
5 year rate: 1667

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

chiefie

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#1202624 23-Dec-2014 13:11

Who are you bank with?

I'd hold at 2 years for now, or if you have the option to split, then do a portion on 3 years and the remaining on 2 years, that give you a bit of round-robin option when a term ending earlier then you can adjust to suit the market at the time.

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lxsw20

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#1202625 23-Dec-2014 13:13

I've just fixed with ANZ 3 years at 5.69%. I would ask if they can do better rates than that, worst they can say is No.

lokhor

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#1202626 23-Dec-2014 13:17

lxsw20: I've just fixed with ANZ 3 years at 5.69%. I would ask if they can do better rates than that, worst they can say is No.

It's through a mortgage broker and I don't think they will due to low equity.

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

lxsw20

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#1202628 23-Dec-2014 13:19

How long until you're over 20%?

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