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It is good to see the Reserve Bank and bank chief economists finally getting out there and calming the market down regarding fixed mortgage rates. Proudly, we were the first to make this call last Wednesday with Don’t Panic About Rates and Don’t Panic About Rates – II (which had some analysis to support it.) There was a lot of misinformation out there about “inflation” and “currency issues” driving up rates and scaring people. Admittedly there was so much misinformation out there we started to question ourselves!
We were also the first to pick the bottom of the fixed-rate mortgages back in February (Long Term Rates have Bottomed) and the first to pick the Fixed Rate Break Opportunity back in September 2008. Where do you get your advice? If you want quality, reliable advice from someone that really knows what they are talking about then think about (1) subscribing to our monthly newsletter (2) letting us arrange mortgage finance for you. Apply Online.
What will happen with fixed rates?
As we’ve said all along, interest rates are set to stay low for a long time. We are only six months into the economy easing and the interest rate cycle lasts about seven years. That means you do not need to worry about rates getting back to 9.00% for an extremely long time.
I’m picking short term rates will get down to 4.95% and that long-term fixed rates will gradually reduce again with the five-year rate bottoming at around 6.95%. There is definitely no harm in staying in variable or a six-month fixed rate for now.
Strategy 1
If you are inherently conservative, stay floating for now and look to refix between June and October. Split your mortgage between three years and five years. You might still average the rate down to under 6.50%. Splitting reduces the risk that your whole mortgage rolls over to a high rate in the future. This is a good idea because nobody knows where rates will be in five years’ time.
Strategy 2
The one-year rate is going to get really low (circa 4.95%.) This will be 2.00% lower than the five-year fixed rate. So another option could be to take a mix of one-, two- and three-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 two years plus. The biggest obstacle to the property market (and inflation) will be the tight lending criteria from the banks, which won’t change anytime soon.
Strategy 3
Stay on variable rates until after the April official cash rate (OCR) announcement. Look to lock in a 12 to 18 month rate close to 5.00% and simply enjoy the low rates! In around 24 months, once the economy starts to improve, then lock in a five-year rate knowing that five years at this point should get you past the top of the cycle. This is my personal strategy and I’m very clear what I’m doing. I’ve set a trigger that when the five-year rate legitimately gets to 7.50% to 8.00% I’ll lock in straight away. And I’m not expecting that for two years yet!
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About us
Squirrel is an independent 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. If you are buying a new home then you can apply online with us and we’ll save you a bucketload of money, time and stress. Sign up for our free newsletter and get emailed our latest mortgage advice and insights on the housing market.
JB (author of this blog) is the former general manager (products) at ANZ National Bank and has managed over $15 billion of mortgages.
