Money – Fix, float or split your loan?

The question I am most often asked is, ‘When is a good time to fix my mortgage rate or what are rates going to do?’ I have never been a very good crystal ball gazer or Tarot card reader, but I can sense change is in the wind – the Finance Minister has made a statement that says Kiwis are borrowing too much and we need to be aware of the rising cost of funds now that our banks are having to borrow more of the money they lend us from overseas banks. He paints a picture of things not being too healthy in the US and European economies, which usually means we are in line for some interest rate rises soon. The Reserve Bank says it is likely that the official cash rate will reduce by 0.25 per cent in the next review on November 10, however will this translate to lower mortgage rates for consumers?

The talk around from our banks is that their margins are being squeezed and less of their mortgage books are being funded by retail deposits (our money in the bank) and they are having to borrow more offshore. So, I would suggest that it is likely the rate cut will not be passed on (usually only affects floating rates) and that fixed rates could even start to rise. So, as a mortgage holder, what should you be thinking about with regards to your own mortgage?

Fix, float or split some across fixed and floating? As always, my answer is usually that it depends on your own personal situation. I always encourage clients to sit down and think about what their financial situation might look like in one year, two years, three years and beyond. A recent article I read pointed out that many consumers just take the off-the-shelf fixed rate they are offered and don’t seek enough advice with regards to the correct structuring and different products available. Did you know you can split your loans into floating, fixed for 1,2,3,4,5 and even 10 years, or even into a flexible revolving credit facility. This may mean you have four or five different loans under the one mortgage, but it allows you to hedge the interest rates and have different parts of your loan coming off fixed rates at different times over long periods. For example, if you split a $500,000 loan into five $100,000 loans you can hedge against rising rates over a five-year period. The four and five-year portion which you could fix now at say 4.79 per cent might be a very good option if, in three years time the rates were say 7 per cent. I suggest you seek out the advice of a good advisor and discuss your own future financial plans before doing anything.