Interest rates are going down! Yes... you heard it here first (more likely fifty-third but hey, who’s counting). The light we’ve been looking at that we thought was the end of the tunnel was indeed such, and not just a train heading towards us full pelt. The recent OCR announcement and subsequent bank interest rate drops have breathed a new fresh lease of life into the property market and I couldn’t be happier. I don’t want to get carried away, as we have a LONG way to go to get ourselves to anywhere close to the resemblance of 2019 (which may not even be advantageous... but that’s a topic for another day), but I do want to outline my top 5 things to keep in mind in our current interest rate environment.
N.B - These 5 pieces of advice have all been given on the assumption that rates are going down and will continue to decrease in the near future. This is not a guarantee but is a calculated assumption made using my industry knowledge and experience. It should not be construed as personal advice and you should always speak with an adviser before fixing your rates.
Delay your refix.
Seems simple, and common sense, but believe me the banks will be on you early to refix and brokers systems are set up to contact you early and being careful is always a little more assuring than simply waiting. When your fixed rate is coming up for expiry, you do not have to lock in your new rate early and there is no cost to leaving it to the last minute. Letting your loan go on variable for a few days will only cost you a percentage point or two, but the benefits of waiting in the current environment could be huge! The markets are pricing in further OCR cuts of 0.50 - 0.75% before the end of the year which may mean much lower rates over a 6-month, 12-month, 18-month or longer period. Be aware of the date your loan is expiring, chat to your mortgage adviser early to start the conversation and sign the forms required, then sit back and wait whilst home loan interest rates continue to fall, please remember to fix as close to your expiry as you feel comfortable! The bank will be in touch about 90 days out from expiry, this is a courtesy from them, and is not a requirement to refix, seek advice from a mortgage adviser if you’re worried and don’t pay more interest than you need to.
Don’t ratelock.
Ratelocks are used to ‘lock’ in a certain interest rate before the settlement of a new loan facility or refix date of an existing loan. So, for the same reasons as above, choosing not to ratelock is a sensible call. You can choose the term you want to fix for but opt for the rate they offer you on the date the loan rolls over or settles. You will sign loan documents with current rates, but if you choose not to ratelock, you are not locked into that interest rate and can change if they decrease between the signing of your documents and settlement. If you do ratelock, you are obligated to accept that rate you have selected or subject to fees for breaking and a complicated redocumentation process if you want to change. Given the current environment there is an argument not to select “yes” when asked about ratelocks.
Review your lending frequently.
Understanding your current loans and interest rates, and how they compare in relation to the current market interest rates is an important thing to know as a borrower. Chatting to a mortgage adviser to go through your options, the cost of breaking your current fixed interest rate and the benefits of refixing to the current market interest rates is a prudent step to take. Mortgage Advisers are well equipped to have those conversations.
Break fees are in all honesty more complicated than you would expect to understand. Thankfully my esteemed colleague has kindly explained how much they are! Speaking with your adviser to understand the current interest rates available and making informed decisions at each point could save you thousands in interest. Even during your fixed term, you have options, and you can explore what it would cost to get you onto lower rates after hindsight has told you we were all wrong a year ago.
Pick the right fixed term.
Fixed rates are a reflection of the market's expectations around the future interest rates at a certain point in time. Because the future is uncertain and the further, we look forward into the more uncertainty we face there is normally a risk premium built into future interest rates which means that longer term interest rates tend to be higher than shorter term interest rates. Currently we are in a unique position in the economic and interest rate cycle where this is in fact the inverse, the market expects interest rates to fall over the next 2 – 3 years and therefore the longer-term rates are attractive at the moment. However, when picking your fixed term or a new fixed term, the cost and benefit needs to be weighed up to fully understand the options. There may be a 0.20% difference between the 6 months and 12-month interest rates (with the 12 months being slightly cheaper) which could tempt you to take on the 12-month rate. However, as mentioned above, there is a 0.50 – 0.75% rate cut forecast for the next 4 – 6 months. Taking the shorter term (6 month) fixed rate may cost you 0.20% for those 6 months but allow you a 0.50% or greater discount on rates at the end of that term providing overall savings. , This is a complicated calculation to make and carries some risk as those rate cuts aren't certain. If you have any questions about this, please chat to a mortgage adviser.
Take advantage and pay off your loan faster.
Now this isn’t for everyone, and I know there is something of a cost of living crisis going on at the minute and so any reduction in day-to-day expenses will surely we welcomed with open arms, but if you’ve survived on your high rates and can continue to do as such, the benefit is absolutely more than you would expect.
Take a $500,000 loan for example, you have 28 years remaining and you are fixed in at 7.00% which is common in the current times. Your fortnightly repayments are currently around $1,570.
If you were to refix this loan for 6.30% and not reduce your repayments, you would put yourself in a position to pay off your loan almost 6 years sooner, save a little over $100,000 in interest over the remaining years and put yourself in a considerably better equity position than you would otherwise be. Whilst it feels like you’re paying more to the bank, you’re in fact taking money out of the profits they make from you, and giving it to your future self, saving both time and money in the long run.
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