Interest rates are climbing, should you break and refix?

Sometimes choosing the right interest rate can require some crystal ball gazing.
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Sometimes choosing the right interest rate can require some crystal ball gazing.

Interest rates are starting to climb after several years of record lows.

If you are a homeowner with six months or a year left on your fixed-term mortgage, you may have started to wonder what rates you will face when your loan next rolls off.

You might ask: Is it worth breaking the loan term now, to refix for a longer rate that will see you through the impending increases?

The good news is that at the moment it is cheaper to get out of a fixed term than it has been.

READ MORE: Structural shift in interest rates means houses permanently more expensive: Economists

Banks charge break fees based on the difference between what a borrower has agreed to pay in interest for a chunk of money, and what they could charge a new customer.

That means, when rates are dropping, it costs more to get out of a fixed term. But in a time of rising interest rates, it is possible that the bank could lend that money again at a higher rate, so you may not be stung with much of a fee.

But is it worth breaking a term now to lock in longer certainty?

ANZ's calculations are that mortgage rates would have to rise to about 6 per cent over the next year to make it worth taking a three- or four-year rate at present, based on the advertised specials available.

That is in line with predictions, but only just. It does not take into account any savings you might make if you have already locked in a cheaper short-term rate than what is now available in the market.

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Banking expert Claire Matthews of Massey University said people needed to consider their current interest rate and how that would change, and what they thought interest rates would do in future.

"It does appear interest rates are moving up, but not quickly, and to some extent people have already missed the 'best' rates.   Given the slow rate of increase I think it is going to be difficult for many people to justify breaking their current fixed rate to get a new one, but it may be a good time to fix for borrowers who don't currently have a portion of their home loan fixed."

Gareth Kiernan, chief forecaster at Infometrics, agreed there would have to be a good rate on offer to make the idea compelling.

"The argument for breaking only really applies if the interest rate curve appears to be inconsistent with where interest rates are forecast to go – so if you have five-year rates currently sitting below 5 per cent, for example, breaking might be worthwhile to take advantage of them because all expectations are for interest rates to rise so locking in a relatively low rate for a long-term will save you money for five years."

Nick Tuffley, chief economist at ASB, said active management would result in a lower interest bill.

"Purely by price we see fixing for one year and repeatedly rolling onto a fresh one-year term as the slightly better option versus picking a long-term fixed rate at present.  Because the yield curve has steepened up so much over the past six months the cost of the certainty from fixing for longer terms is high. "

What might rates be like mid next year?

ASB predicts:

One-year standard rate: 5.1 per cent
Two-year standard rate: 5.5 per cent

Infometrics predicts:

Floating: 5.9 per cent
One-year: 5.1 per cent
Two-year: 5.3 per cent
Three-year: 5.7 per cent
Four-year: 6 per cent
Five-year: 6.2 per cent

At present:
Floating: 5.8 per cent
One-year: 4.88 per cent
Two-year: 5.14 per cent
Three-year: 5.38 per cent
Four-year: 5.69 per cent
Five-year: 5.85 per cent

(Median rate according to mortgagerates.co.nz)

 

 

 - Stuff

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