It’s been a year already since we started the process of drawing down a loan for our home build.
This means that a portion of our home loan came off fixed term late last week.
We, just like everyone else, struggle with such decisions. Just because I am financial adviser doesn’t mean I have any more of an idea of which direction rates will go and by how much than anyone else. I do however know the best decision for our circumstances.
We were tossing up between fixing for 6 months or 1 year. Although it was tempting to fix 18 months at 5.99%, we were willing to embrace higher in the short term for hopefully lower in the long term.
We were offered a 6 month rate of 6.85% and a 1 year rate of 6.19%.
If we chose the lower 18 month rate instead of the 1 year rate, we would need the 6 month rate to be 5.6% or less at the 1 year mark to be better off. A drop of 1.25 percentage points in 12 months.
If we chose the 6 month rate instead of the 1 year rate, we would need the second 6 months of the year to be 5.55% instead. A drop of 1.3 percentage points in 6 months.
A lot of people are fixing for 6 months knowing that rates are coming down. There is no question that rates are likely to come down. But that doesn’t mean an automatic 6 months fix for the shortest term possible. The questions is, will rates come down by enough?
We think that although a drop of 1.3 percentage points or more over 6 months or 1.25% or less over 12 months is definitely possible, the alternative is more likely. We believe the 6 month rate will be more than 5.55% in 6 months and less than 5.6% in 12 months. It’s just a calculated guess.
On current rates and with the calculations above, we ended up weighing up between a 12 month or an 18 month loan. We found 6 month scenario unlikely. 6 month rates will surely need to come down soon to be worth any consideration or maybe banks don’t want to encourage people fixing for 6 months only. I feel there is an opportunity for a bank to be more aggressive in the 6 month space currently but alas, nothing worth considering when we were making our decision.
That is why we are fixing in for 1 year at this stage on current numbers. It was a close call with 18 months.
The other thing we did in this declining rate environment was to wait as long as possible to make a decision. With rates obviously going down, the longer you can leave it the more likely you are not to miss out on the most recent drops in interest rates. We received an email from Westpac back in early August reminding us to fix. If we did so then, we would have been fixing at much higher rates. Even if we fixed a few days earlier than we did or needed to, the 1 year rate would have been closer to 6.45% rather than 6.19%. We waited until the last day before our loan rolled over.
Finally, it’s generally wise to spread your mortgage over varying fixed terms so that you are not having to refix the whole mortgage at the same time. This limits the risk of coming off term at a bad time to fix. Because this re fix makes up a small portion of our entire mortgage, it is not too much of a concern either way.
Please note this is not financial advice on what you should do. Everyone’s situation is personal. This suits us in the stage we are at.
You need to determine your risk tolerance, when your other loans are expiring, whether you need more cashflow now, whether you are considering moving property, whether you are considering paying down the mortgage, and so on. If you are still unsure, then maybe split the loan up further so you have some in each term if that works for you.
On the financial side of things, if you want to see the difference between choosing different fixed term lengths and rates, then use our free calculator that I used for our own situation. Mortgage rate required when choosing between two or more terms.
If you need help with any financial decisions , then get in touch today.
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