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Is now the time break your fixed rate?

The Official Cash Rate is widely predicted to drop this Thursday, some experts are predicting by up to .50%.

If you've got an existing fixed rate loan then this poses the question of whether you should be looking to break your current loan and look to re-fix at the lower interest rates which could head even lower if the OCR continues to drop.

The key thing you need to know is whether you are going to save money by breaking your fixed loan. You will likely have to pay a "break fee" for breaking your fixed loan so there needs to be some calculations done on whether you're going to save more with the new interest rate than the cost of the break fee.

Some quick calculations on this would be...
$250,000 loan fixed @ 6.5% with 2 years remaining.
If you re-fixed this loan for a further 2 years @ 4.99% the interest savings would be $7,550 over the two years. So if your break cost is less than this then it would make financial sense to break your loan and re-fix. If not then it's not worth your while.

The other factor at play when considering breaking your loan is the opportunity to take advantage of historically low rates and fix long term. Currently these rates are a little higher than the 1 and 2 year fixed rates but they are at historical lows for the terms and may provide better value over the long term. So although your savings might be less in years 1 and 2 you could lock the savings in for perhaps 5 years. So if you're looking for long term certainty of costs then breaking a higher rate to fix long term could be the right time for you.

This could also be an opportunity to see whether your current bank is looking after your needs and are willing to offer you a good deal to stay. Another lender could be willing to offer you a cash back that would cover the costs of changing banks and may even contribute towards the cost of breaking your loan.

So to the answer the question of "Is now the time to break your fixed rate?" - It really comes down to doing the numbers on your personal situation. This is where we can help by doing the following:

  1. Check with your bank on the cost of breaking your current loan
  2. Do the numbers on the savings off your current fixed rate, or rates vs a new structure
  3. Negotiate with your existing lender for an excellent deal
  4. Negotiate with other lenders to see whether there is a better deal available for you
  5. Advise on a new structure that is going to be the best fit for you in the long term
  6. Put the new structure in place for you
If you would like to discuss the options for your personal situation then please email me personally on adam@mymortgage.co.nz

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Adam Thompson
Mortgage Adviser
My Mortgage

Cambridge, Matamata, Te Awamutu, Hamilton, Auckland