We are starting to think that 5.95% for 5 years might be as low as the 5 year fixed rate gets. Yes, short term rates will go lower and could get as low as 4.95%, but long-term rates look like they are done. In fact, the 5 year rate may struggle to get below 6.50%.
Our logic is that for a 5 year mortgage rate of 5.95% the bank has to find an investor prepared to invest for 5 years at 3.50%. There are not many people prepared to do that! On the other hand, luckily there is not too much demand for 5 year rates – yet!
As soon as demand for 5 year fixed goes up, banks will be under pressure to increase the rate. Luckily most Kiwis still think rates are dropping further so we are possibly 3-4 months away from a rush on 5 year fixed. Maybe there won’t be a rush on the 5 year fixed at all. The rate difference between 1 year at 4.95% and 5 year at 6.00%+ will be too large for some people and they will opt for short-term rates.
All of this means that you should look to start locking in 5 year fixed rates from April onwards. Don’t leave it too late and don’t be too greedy. We’ve always said, if the 5 year rate gets below 6.00% don’t even bother thinking about it , just lock it in. Even at 6.25%-6.50% it is fairly good long-term value. You can also split your mortgage in multiple parts and average the cost down.
Strategy 1
If you are inherently conservative, when the Reserve Bank drops the Official Cash Rate (OCR) on March 12th, split your mortgage between 3 year and 5 year. You might still average the rate down to under 6.00%. Splitting reduces the risk of your whole mortgage rolling over to a high rate in the future. plitting your mortgage is a good idea because nobody knows where rates will be in 5 years time.
Strategy 2
The 1 year rate is going to get really low (circa 4.95%). This is 1.50% lower than the 5 year fixed rate. Another option could be to take a mix of 1, 2 and 3 year fixed rates. The advantage of this approach is that you get the benefit of lower rates now. For cash strapped property investors this is a good option. Interest rates are a natural hedge against property. Our view is that interest rates will only start going up again when the property market improves in 2 years+. The biggest obstacle is tight lending criteria from the banks, which won’t change anytime soon.
Who are we?
Squirrel is a Mortgage Broking and Advisory business. We are happy to help you get the best out of your mortgages whether that is buying property, refinancing, or simply restructuring everything to make it work better.
