To fix or float & “miss the boat”?
When you consider that mortgages take a big chunk out of our disposable income, it’s understandable to take an interest in the rates on offer & where the market is going.Yet in the current rapidly changing environment one wonders
What is the best course of action with our mortgage?
Do we fix now or hang on at high floating rates & hopefully ‘ride the tide of seemingly reducing interest rates’?
When do we ‘put our foot in the water’ and take action?
What’s the best source & who’s the best person to listen to?
At Foxplan we believe that it’s not the ‘interest rate’ that’s important, but the ‘rate of repayment’ that’s crucial. Now we do believe in taking advantage of favourable rates when available, yet not to be ‘fixated’ by rates. A mortgage is an investment in your long term security, wellbeing & wealth. All successful investment is goal orientated and thus planning driven. All unsuccessful investment is performance (interest rate) orientated & therefore market driven.
For instance, Kiwis are often ‘fixated’ & debate the % point difference in rates lender’s offer, yet:
- These interest rates need to be put into context of the overall term of the loan. Fixed rates are only for 6 months to 5 years – on a loan spread over a 25 to 30 year time frame. The ‘great rates’ on offer are thus really only short lived & may not be so ‘great’ in a few years time. It was not that long ago when the 6.2% Fixed 5 year rate was the ‘best rate’ around. Different if you are In the USA where you can fix a loan for 30 years!
- The difference in percentages sound large, yet converted to dollars are not large by comparison. For instance, a 0.04% difference between Fixed 1 year 4.45% versus Fixed 2 year 4.49% sounds big, yet on a $100,000 loan it is only a difference of $3.33 / month. Thus the fixed 2 year rate would be better given the longer certainty of stable repayment. The rate difference converted to dollars gives a much better context.
When is it best to ‘time the market’. To ‘tip your toe in the water’ & pick a rate? And which rate to pick? Even the economists (with their “No liability” statements) and all the access to data & professional support cannot time the market well and do also get their predictions wrong
From a mortgage planning perspective we follow a planning approach:
- What is the time frame for owning the property? If you are looking to sell the property in the short term, then short term rates are best – either floating, Fixed 6 months or 1 year.
- If owning property for long term, then Foxplan prefers to adopt an ‘interest rate’ risk strategy using Foxplan’s mortgage “laddering System”.
The “interest Risk” strategy protects against fluctuating interest rates by ‘laddering’ the total loan and building a loan structure around your cash flow needs, to increase the rate of repayment.
In the end, it’s not the rate that important, it’s the rate of repayments.
If you would like a no obligation check on your rate of repayment, please give one of our trusted mortgage advisers a call.
Article written by Stephan Jagers, September 2015
Stephan Jagers
021 633 885
Thivakar Pushparaj
021 348 701