Following the OCR cuts majority of banks reacted by mostly passing on the .5% to the floating rates. The fixed rates however received less love. The short end 6 months is where the real action has been, with many banks able to get pretty close to 6%, which is about .4% less on average than what we saw a few weeks ago. The 1 year rate is also receiving some attention with approx .25% drop.
The advertised specials reveals that the longer term fixed rates are pretty static. In saying that the 2 rates has just dipped below the 3 year rate at Westpac.
Could these drop further?
Fixed rates can drop outside the RBNZ’s OCR cycle. Usually there can be some movement in the week following drops, however this time we did see some of the banks move slightly before the OCR announcement. With Christmas approaching we wonder how much appetite there is from banks for lending growth. Especially given the long turnaround times. However there is a chance that the new year brings some fresh competition.
Is it worth paying more to get less later?
The 3 year fixed rate is around .5% cheaper than the 1 year. For a home loan of $750,000 this is $3,750 difference for a year. Going long now would mean you get that in your pocket straight away but after one year you could find that the one year rate has dropped to match this. This is assuming that the portion of OCR cuts that gets passed on to fixed rates gets smaller as we approach the potential bottom.
The question becomes is it possible for the longer term fixed rates to drop below 5% over the next year. As at some point you might prefer certainty if you felt we had reached the bottom of the rate cycle. Is this possible? Yes, Is it a given, not sure. Placing some of your home loan on a longer fixed term gives you certainty. For some situations this is vital.
How much could break fees be?
What if you fix for longer and then break early? The break fees cant be that crazy can they? Yes they can. A $750,000 home loan that is fixed for another 2 years at .5% higher rate than market, could expect a fee of $7,500 or more. This is a crude example but it is possible to be facing break fees in other circumstances such selling and buying a home.
Hence it is vital to talk to a good financial adviser, like us, before making any commitments.
Splitting worth considering
Remember there is another strategy which is becoming more fashionable, fixing some long some short.
