Mortgages - to fix for the short- medium- or long-term?

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jonathan18

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#248661 4-Apr-2019 15:02

One of our mortgages comes due in a few weeks, and we're able to lock a term in now if we so wish.

We're looking at fixing for at least two years, but I'm unsure of what the best period of two or more years would be. (I heard RBNZ could be looking at dropping the OCR soon, but I understand that tends to impact the floating and shorter-term rates?)

My bank's offered me these rates:

2 year: 3.95

3 year: 4.45

4 year: 4.89

5 year: 4.29

TBH, based on those rates it's only really the two and five year terms that interest me much; but what are the longer-term rates expected to do over the next couple of years, and which term would people recommend and why?

I know we could wait around for the OCR to drop and to see what flow-ons this results in - the next announcement is 8 May, which is only six days after the mortgage's term is up - is it even worth waiting for that, given we're looking at fixing for two or more years anyway? I wouldn't wait any longer than that, given the floating rate is so relatively high (5.8%).

Thanks for any advice.

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Delphinus

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#2210790 4-Apr-2019 15:24

Have you considered doing both? Fix some at 2 years and some at 5? How fast can you pay it off? Eg is it worth having a mixture of fixed (over 5 and 2 years) and revolving credit (if you're good with not spending it).

tdgeek

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#2210804 4-Apr-2019 15:27

No one knows future rates. Shot term we know they will remain low, there is the doom and gloom of the next GFC everyone seems to be predicting, and to be fair, its not just a conspiracy, there are overseas issues that lend itself to that. 5 year term looks attractive

sen8or

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#2210811 4-Apr-2019 15:37

If you are disciplined, why not fix a portion and put a portion on flexi?

We have done this, taken an amount that we believe will be repaid over 2 years (over and above our standard mortgage payments) and put that on flexi, then put the rest on fixed rate for 2 years (3.99% I believe). Pay etc goes onto flexi, we take out a weekly budget for food and bills etc, the rest just sits there, then mortgage payment and interest comes out. So long as you are good at not spending and have a way of tracking reductions, this is one of the fastest ways to reduce mortgage quickly.

You will very rarely beat the banks economoists / rate setters at picking when rates will rise and fall, but if you can find ways of having the least amount of borrowing for the longest time, and use whatever free credit you can, then its an effective way to reduce overall borrowing costs.

We don't go the whole hog (the old "put everything on a credit card and pay full balance on the due date") as I just can't bring myself to have a normal credit card, but you can still make good inroads with small steps

jonathan18

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#2210819 4-Apr-2019 15:42

Thanks for the replies.

We already have our total mortgage split into three loans (four if you count access to revolving credit); the other two are due at later points (end of this year, end of next year). We're already paying way over 'minimum' for all three loans, and will increase repayments when we re-fix this loan plus increase the 'minimum' repayments close to the new payment to maximise the 5% lump sum repayment ability. I don't think it's probably worth splitting this loan again, especially if the bank is going to charge any fees for this (it's our largest loan but is still tiny by Akld standards!). That said, I'll still ask the bank about the feasibility/cost of splitting it.

We can also look at using a bit of the revolving credit (which is where our savings reside, and is currently not being used) to make a lump sum payment against the loan before it's re-fixed, and pay that off through savings over the next two-three months, which essentially amounts to the same as keeping part of it on floating.

I do like the look of that 5-year term indeed - it's 0.5 percentage points lower than the loan's current two-year rate!

jonathan18

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#2210826 4-Apr-2019 15:59

sen8or:

If you are disciplined, why not fix a portion and put a portion on flexi?

We have done this, taken an amount that we believe will be repaid over 2 years (over and above our standard mortgage payments) and put that on flexi, then put the rest on fixed rate for 2 years (3.99% I believe). Pay etc goes onto flexi, we take out a weekly budget for food and bills etc, the rest just sits there, then mortgage payment and interest comes out. So long as you are good at not spending and have a way of tracking reductions, this is one of the fastest ways to reduce mortgage quickly.

You will very rarely beat the banks economoists / rate setters at picking when rates will rise and fall, but if you can find ways of having the least amount of borrowing for the longest time, and use whatever free credit you can, then its an effective way to reduce overall borrowing costs.

We don't go the whole hog (the old "put everything on a credit card and pay full balance on the due date") as I just can't bring myself to have a normal credit card, but you can still make good inroads with small steps

Yeah, I hear you with part on flexible - we do have revolving credit, and use it to store all our income, savings etc in. It's currently in credit, but we will indeed look at using a bit of it to pay a lump sum off the fixed when it comes due. But my first preference is to make full use of the 5% additional repayments one can make across all the loans, as that means maximising the lower rate of the fixed (eg, 4.29 vs 5.85!).

We are electing to spend a decently high proportion of our income on the mortgage, electing to do this instead of o/s trips etc - and increase repayments whenever our income allows it - the result is principal repayments on the three loans are 81, 83 and 93% as a proportion of total repayments. I'm just always keen on looking at what I can do better - and am careful about fixing for long terms after once getting burnt quite badly when long-term rates dropped very significantly after we fixed!

That said, even if the five-year rate was to drop lower than the current 4.29, it's still historically a fantastic rate that I should remain happy with.

mudguard

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#2210828 4-Apr-2019 16:16

Looking at that, I'd say you're fairly well sorted. When you split the loans up, you reduce the shock you expose yourself to, should rates change, IE fixing $300,000k for five years for 4.29% and something happens and the rates are up to 10% when it comes off.

As for picking the market, well I don't think anyone can. Personally I didn't think rates would stay as low as they have, but who knows? It would probably take an external shock for the rates to climb again.

risingstar

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#2210838 4-Apr-2019 16:33

jonathan18:

Thanks for the replies.

We already have our total mortgage split into three loans (four if you count access to revolving credit); the other two are due at later points (end of this year, end of next year). We're already paying way over 'minimum' for all three loans, and will increase repayments when we re-fix this loan plus increase the 'minimum' repayments close to the new payment to maximise the 5% lump sum repayment ability. I don't think it's probably worth splitting this loan again, especially if the bank is going to charge any fees for this (it's our largest loan but is still tiny by Akld standards!). That said, I'll still ask the bank about the feasibility/cost of splitting it.

We can also look at using a bit of the revolving credit (which is where our savings reside, and is currently not being used) to make a lump sum payment against the loan before it's re-fixed, and pay that off through savings over the next two-three months, which essentially amounts to the same as keeping part of it on floating.

I do like the look of that 5-year term indeed - it's 0.5 percentage points lower than the loan's current two-year rate!

Based on the Tony Alexander's prediction, there is still some downward pressure on Interest rates. He recommends to fix it for something less than 3 years.

More details here -> http://tonyalexander.co.nz/wp-content/uploads/2019/03/WO-March-28-2019.pdf

There will be one more of this coming from him tonight.

Senecio

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#2210845 4-Apr-2019 16:44

Our current mortgage is split 3 ways

40% fixed for 2 yrs
40% fixed for 3 yrs
20% floating (line of credit). This last portion is in credit until we undertake some major kitchen renovations soon

The 40% fixed for 2 yrs is due to come up for renewal in June so I'll also be keeping an eye on forecasts etc.. in the coming months. At this point I'm just thinking of fixing it again for a further 2 yrs based on information I've gathered to date including Tony Alexander's update above. That may change before I get to June but that where my head's at at the moment.

tdgeek

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#2210869 4-Apr-2019 18:46

sen8or:

We don't go the whole hog (the old "put everything on a credit card and pay full balance on the due date") as I just can't bring myself to have a normal credit card, but you can still make good inroads with small steps

We dont do that but we use the CC a lot, and use it as a convenience not as a "credit" facility. We get hotpoint, free fridge freezers etc

tdgeek

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#2210871 4-Apr-2019 18:49

risingstar:

jonathan18:

Thanks for the replies.

We already have our total mortgage split into three loans (four if you count access to revolving credit); the other two are due at later points (end of this year, end of next year). We're already paying way over 'minimum' for all three loans, and will increase repayments when we re-fix this loan plus increase the 'minimum' repayments close to the new payment to maximise the 5% lump sum repayment ability. I don't think it's probably worth splitting this loan again, especially if the bank is going to charge any fees for this (it's our largest loan but is still tiny by Akld standards!). That said, I'll still ask the bank about the feasibility/cost of splitting it.

We can also look at using a bit of the revolving credit (which is where our savings reside, and is currently not being used) to make a lump sum payment against the loan before it's re-fixed, and pay that off through savings over the next two-three months, which essentially amounts to the same as keeping part of it on floating.

I do like the look of that 5-year term indeed - it's 0.5 percentage points lower than the loan's current two-year rate!

Based on the Tony Alexander's prediction, there is still some downward pressure on Interest rates. He recommends to fix it for something less than 3 years.

More details here -> http://tonyalexander.co.nz/wp-content/uploads/2019/03/WO-March-28-2019.pdf

There will be one more of this coming from him tonight.

Everyone knows there is downward pressure. You could take the shortest period. What if there is a GFC? The 5 year rate is bugger all more, I'd be tempted that way

mike

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#2210893 4-Apr-2019 19:45

fix for 18mnths or 2yrs to start aligning the loan end dates.

you need the ability to be comparing offers and new lending bonuses from other banks.

you already have the right strategy of reducing principle which beats de-risking interest rates.

I would get another bank/broker offer now as you may get ahead now breaking and switching banks.

nzkc

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#2210905 4-Apr-2019 20:17

The size of your mortgage and the amount of time it will take for you to pay it off comes into play. Based on the fact you are looking at 5yr rates I'm going to guess you have a pretty large mortgage still and expect to take a while to pay it off. That being the case, lower rates will make a bigger difference to repayments. This gives you the option to increase your repayments and shorten your term.

Once you get down to a small mortgage, the rates make stuff all difference on the repayment amounts.

In your case, I'd be going for the smallest rate whatever it was. Currently, and it will depend on the institution you are with, you would be looking at the 1 to 2 year rates and anything in between.

timmmay

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#2210906 4-Apr-2019 20:18

My opinion (which is worth what you paid for it) is rates are going to stay low for years yet. I would go with the one year rate as it's generally lowest, but if you don't want to do that go for the 2 year rate. I can't remember exactly how ours is, but we're fixing parts for between one and three years.

I also think based on the articles I've read that the world is heading for another slowdown, if not another recession. I've moved my kiwisaver to a conservative plan, and I'll keep it there for a couple of years. I suggest anyone in growth consider putting at least a portion into balanced or conservative. I have my family in conservative for now, to reassess in 2020 or 2021.

nickb800

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#2210908 4-Apr-2019 20:24

I wouldn't overthink it. The banks have produced their rate cards with better financial nous than we will ever have. They expect to make a profit no matter what term you choose - the range of interest rates over different terms reflects their expectation of likely movements

cddt

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#2210912 4-Apr-2019 20:29

Both ASB and BNZ have just dropped their 3 year rates to 3.95%. That's a good option.

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