Why fixing for five years now could be a smart move

In an environment where interest rates are dropping, it can be very tempting to simply go for the lowest rate on offer. After all, the bigger the saving, the better, right? But - is the lowest rate always the best option?

Almost certainly not, as many found out recently when the one year rate went from 1.99% to over 7%!

So - how can you avoid being hit with big rate jumps in the future?

We don't have a crystal ball, so first things first is to spread the risk - split your lending into two, maybe three, loans that you can fix for varying periods of time, to spread out your refix dates and smooth over the impacts of any future rate increases by having them impact you gradually, rather than overnight.

Then we can 'hedge our bets' - we might look to take advantage of the lowest fixed rate with one loan, but spread the risk by fixing another for a longer term.

Secondly, we need to consider the impact of interest rate cycles.

Since the early 90s, New Zealand's mortgage rates have worked roughly in five-year cycles - typically there will be a high and a low point in any given five-year interest rate cycle, and whilst there's no guarantee things will continue that way into the future, history is all we have to go off. With this in mind, the key question to ask when choosing a rate is - do I think this rate could expire at a low point, or a high point?

Given many economists predict we are at, or very near to, the 'low point' in this current cycle, history would suggest in approx 18 months-2 years' time rates could be higher than they are now.

But, with the lowest current fixed rate on offer the 18-month term (at 4.45%), is it really good value if you find yourself fixing at a higher rate than that?

On the flip, the five-year fixed term is currently 4.99% - this offers exceptional value when you look at the rolling average rate for this fixed period, sitting well below it.

We are very unlikely to return to 'Covid rates' of 2-3% - so, perhaps 4.99% for five years is the certainty you need, after coming off a circa-7% rate?

If history has taught us anything though, it's that Kiwis love to fix for 12 months - and at the moment, I don't see any major issues with that either.

Remember - get advice before you refix. It'll give you certainty that you're getting a good rate, and allows you to sense-check your strategy before locking in to a major commitment.