Should I fix now (even if I need to break a fixed mortgage)?

Housing Market Written by John Bolton, Dec 13 2015

Off the back of this post, I know we'll get a flurry of activity before Christmas and risk moving the market if there is a rush to fix. Some bank economists are talking of further rates cuts so there shouldn't be a rush to fix just yet. I think now is the right time to be fixing your mortgage on to longer term fixed rates especially the 3 year fixed (currently below 4.50%.) Whilst in the short term there is nothing that suggests rates will jump up, all it takes is homeowners to rush into fixing and that will put rates under upward pressure. At this point of a cycle the biggest influence on long term fixed rates is the media and herd mentality.

At the moment rates are typically around 4.20% for 1 year through to 4.50% for 3 years and 4.90% for 5 years. There is a bit of wriggle room on these rates for larger loans, and still cash incentives for refinances.

The NZ mortgage market is now $208 billion. Currently there is $6 billion of fixed rate loans maturing every month and still $52 billion sitting on floating rates. In contrast only $1.33 billion per month has been fixing for 3 years. So it doesn't take much of a swing in behaviour to create a shortage of funding and to push up rates. The other consideration is credit spreads. The world is awash with cheap printed money and that has dropped credit risk spreads. (Credit spreads reflect the risk premium investors require to invest in NZ institutions.)  If some sort of market correction were to occur then credit spreads would blow out and increase bank funding costs. It is too simplistic to assume that rates will stay at current levels because of no inflation. Admittedly, I didn't think rates would get this low, but I have said for a long time that rates will stay low. That view hasn't changed. Rates will ebb and flow around a low average that I would pick is now somewhere in the low 6.00% range. When it comes to mortgage rates, I'm suggesting that we are now pretty much at the bottom of the cycle.

Should I break my existing fixed rate?

Chances are you will have a break-fee if you decide to break a fixed rate before it matures. The break fee isn't really a cost and will reflect the interest differential on the loan over its remaining fixed term. You will save a similar amount in interest that will effectively offset the fee.

So why break?

The rationale for breaking your fixed rate would be to lock in a low long-term fixed rate now rather than wait until your loan matures. For some people this will make sense, especially if they have tight cash flow and want certainty. None of us really know where rates will be in 12 months time. The impact of the "Herd" could see longer term rates jump up fast when they do eventually start to increase. If you want us to do a Mortgage Review and work out your break fees and whether or not it is worthwhile breaking your mortgage then get in touch or email your adviser. We'll need to know your loan balance, fixed maturity date and how long you fixed it for.  

We can help. Have a chat to one of our advisers.