Choosing your mortgage strategy in this environment

Is your fixed-rate mortgage due to expire soon? If so, you may be considering the next steps now that interest rates continue to increase.

The answer depends on many factors. To get you started, here are some key things to think about. And of course, get in touch if you’d like to discuss your options in more detail.

Interest rate forecasts

There are no crystal balls to gaze into, but economists seem to all agree that interest rates are unlikely to drop anytime soon. To control inflation, the Reserve Bank may continue to increase the official cash rate (OCR), with RBNZ forecasting the OCR to peak above 3.24 per cent by 2024.

This is important for mortgage holders, as home loan rates tend to move with official interest rates. Based on this factor alone, you may want to fix for longer terms now (two, three or four years). It may mean paying a bit extra for a while, as longer-term rates tend to be higher, but if you’re looking for budget certainty, it’s worth considering.

That said, if it’s flexibility and lower short-term costs you’re after, then shorter-term rates, which are generally more affordable than the floating or longer term fixed-rates, would allow you to take advantage of lower rates sooner if they become available. As unlikely as that seems now, it’s also not impossible; plus, you’ll be paying lower interest rates in the meantime.

When will your fixed rate expire?

If you know that your fixed interest rate is due to expire soon, but you’re not quite sure when, now is a good time to check.

Usually, lenders notify customers six to eight weeks before the rate expires, and borrowers can lock in a rate within that timeframe. So, you may avoid further increases by fixing as early as possible.

Keep in mind that if you don’t fix it again, your mortgage will automatically move on to a floating rate (usually higher than most short-term rates).

Think about your plans and goals

Choosing your mortgage strategy doesn’t have to be a rushed process. In fact, it’s important to think about your plans and goals, and check that your home loan structure is working for you.

You may be experiencing some important life changes, like planning a baby or a move overseas, selling your home or buying an investment property. Depending on your goals, unlike longer-term fixed rates, a shorter-term or floating rate may be more appropriate for your needs as you could make additional repayments or repay in full at the end of a shorter fixed-rate period with no penalties.

Is splitting your home loan a good idea?

With so much uncertainty and so many options to choose from, you don’t necessarily need to have your entire mortgage on the same fixed or variable rate. You can split your interest rate in as many portions as you like, and have it fixed across different terms.

This strategy allows you to ‘spread the risk’ of being hit with a significant increase all at once, when a fixed rate expires. Plus, it can help you achieve budget certainty with longer-term fixed rates, and flexibility with the shorter ones – it’s the best of both worlds.

However, it may not be the right option for you. So if you’d like to learn more, please don’t hesitate to contact us. We’re here to help.