Most banks in New Zealand have recently started a new round of increases in the fixed loan interest rates of 1-3 years. Usually, choosing a one-year fix term is the most popular choice over the recent years for most people because of its flexibility and it’s always the lowest rates. However, facing the current trend of rising mortgage interest rates, the amount of the increase and the frequent updates. Many of our clients have begun to consider whether they should choose a medium and long-term fixed duration. They want to get some advice for choosing their home loan fix term.

Please note the content in this article are provided for general situation purpose only. It’s not personalized financial advice as they do not consider any person’s particular financial situation or goals. We therefore recommend that you seek advice from your adviser before taking any action.

In today’s video, all abstracts generally cover the following five sections

• The prediction of interest rates trending in the next 3 years
• Why the interest rates increase constantly under current situation
• BNZ ex-chief economist Tony Alexander’s forecast on one year rate.
• Advantages of one-year fixed home loan
• Whether is worth considering for 2 or 3 years fix home loan 

How to fix your home loan 

I believe the rise in interest rates is the general trend in the next three years. The factors that cause interest rates to continue to rise are mainly caused by inflation and housing price. Even though a series of policies to control housing prices implemented by the government since last year and significant changes in bank lending policies have led to a recent slowdown or even a downward trend in housing prices, persistently high inflation forces the Reserve Bank to hike on interest rates.. The factors that cause high inflation are mainly caused by the Covid epidemic, which led to the shortages of material production and freight delay and increased cost. Another primary reason is the further increases in prices on imported goods such as gas and other raw materials because of the war between Russia and Ukraine. The current inflation rate in New Zealand is around 5.9% which has hit a record high inflation over the past ten years, far exceeding the 2%-3% range that the New Zealand government expects to maintain.

Tony Alexander, the former BNZ chief economist, recently has stated that the one-year fixed interest rate will continue to rise to 4.75% by April 2023. At the time of writing, the latest fixed one-year loan interest is 3.99%. It will be most likely that when you watch this video, the interest has increased again. According to the current interest rate of 3.99% and Tony's estimated interest rate, if the one-year fixed method is adopted, the rolling one-year rate over the next two years is around 4.37 % (average of 3.99% and 4.75%). In contrast, the current two-year fixed loan rate is approximately 4.55% - 4.60%. Therefore, setting a one-year rollover fix home loan is still more advantageous consider to cost-saving perspective. If the interest rate happens according to Tony's prediction, then the choice of loan fixing term is straightforward, and there is no doubt that most people will choose one year fix term. However, it is difficult to accurately predict how interest rates will rise, including economists who often have wrong prediction , and it is even more difficult for ordinary people to ensure the accuracy of their predictions.

In my view, the current fixed one-year loan interest rate has the following two advantages over two or even three years.

1. Because too many uncertain factors may affect future interest rate changes, the one-year fixed loan interest rate is more flexible. These uncertain factors can be re-examined in time to make a more appropriate judgment after one year.
2. Suppose interest rates are on the trend of rising. The amount of breaking cost is not much to be considered (most cases the cost is zero). Which means, if it's currently set for a home loan fixed one year and needs to be broken before expiry, it won't incur much breaking cost.

However, not everyone is suitable for a fixed one-year home loan only. Let's look specifically at which case are worth considering for a longer fixed term? Long fix term can be considered under three circumstances. 

1. As mentioned earlier, according to Tony Alexander's forecast, if fixed yearly, the average interest rate for the next two years is 4.37%. Compared with the current two-year fix rate, which is 4.55%-4.60%. The difference is relatively close. Therefore, if you think the interest rate of a one-year fixed term is likely to far exceed 4.75% after one year, you better consider a two-year fixed term to be more certain.
2. Suppose the loan amount is relatively large (how much is large varies from person to person, but usually it is close to one million or more). My advice to our clients is to split your fixed terms. This strategy gives you the best of both worlds. You can balance the cost and certainty. Even if the interest rate increases more than expected, the repayment will only incremental giving you some time to adjust in advance. If you find difficult to form a view on future interest rates, splitting fixed term can be a good strategy.
3. If you already feel repayment pressure under the current interest rates, fixing for long term will provide you with peace of mind. I personally believe the interest rates will eventually return to a 2%-3% in the long run.

Lastly, I would like to remind everyone that if you have cash on hand and planning to make a lump sum payment into the loan to save interest, please think twice before you act. There are so many uncertainties, such as high living costs, Covid, mortgage commitments and job security. It is prudent to keep your cash available to cover any emergencies . If the bank you are lending has products such as offset or revolving, it is best to take advantage of it to reduce interest cost while ensure cash reserves for emergencies at the same time.

Through today’s content, I hope you have gained a better understanding of how to fix your home loans in general. Again, if you would like to talk to us with a one – on – one consultation, you are more than welcome to contact us and let our professional Financial Adviser give you a tailored financial solution.  

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.