I’ve had a few clients recently wonder about how much mortgage rates will need to be at a future point in time to make up for taking a higher short term mortgage rate now.

The thinking is that the general populace believe mortgage rates are going down in the next year, so many people are considering fixing for a year at a higher mortgage rate than longer term rates, in the hope that mortgage rates will drop enough to make up for the short term higher rate.

That got me more curious and looking for a calculator that let clients know if they fixed for 1 year, how much rates would have to decrease by to make up for taking on a higher rate.

I couldn’t find anything of the sort anywhere on the net.

So you guessed it. I made my own. Which you are welcome to download and use for yourself. It is the calculator labelled “Mortgage rates required when choosing between two or more terms”.

Just enter the amount of the loan, the term of the loan, and any interest rate you are looking at, ie. 1 year, 2 year, etc.

From there, you can see how much you will need interest rates to move by to make your decision worthwhile.

I will walk you through an example using current mortgage interest rates.

We will assume you have $200,000 to fix and have 20 years remaining on your loan term. We will assume the following rates:

• 1 year fixed 7%

• 2 year fixed 6.6%

• 3 year fixed 6.5%

• 4 year fixed 6.4%

• 5 year fixed 6.4%

Not a typical rate structure here in NZ. Often we have lower short term rates and higher long term rates, making the decision to fix for shorter periods (1-2 years) much easier. Now, seemingly people are finding this decision more difficult with higher short term rates.

So let’s assume someone is deciding between fixing for 1 year or 2 years. If you choose 1 year, you would need a second year interest rate of 6.2% just to break even with your decision. You would need less than 6.2% to be better off. That is quite a large drop from current rates (80 basis point drop) in one year. Do you think the Reserve bank is cutting the OCR by 25 basis points at least 4 times in the next year and the bank is passing on the full drop?

That’s what it comes down to really.

I am finding a lot of people are being told that interest rates are coming down and this is leading many people to fix for one year. However, it is not being explained to people how much mortgage rates need to come down by to be better off. It is not enough for rates to come down. In some cases they need to come down by quite some margin.

This calculator is really neat in that you can play around with all the different interest rates and terms and see for yourself how much things need to change and if you are happy with the outcome.

Just like most things in life, this should not be an all or nothing decision. It is often smart (less risky) to split your mortgage across multiple terms so that you don’t put all your eggs in a losing basket.

I am adding calculators to the site all the time, so feel free to check back in periodically for anything that may interest you. And my small business does benefit from you sharing my resources, so if you do find them valuable, then please do share this little corner of the internet with social media sites, friends and family.

If you need help with your financial planning, then get in touch and we may be able to help.

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here