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What should I do with my fixed rate?

This seems to be the number one question I'm being asked by clients at the moment... and with good reason as there are a number of factors to consider. The trust is that there is no single right option as we don't have a crystal ball but I've outlined the factors pushing and pulling interest rates below and how you can assess what's best for you depending on how much risk you're willing to take.

​What is pushing interest rates down?

The massive drop in the Dairy Payout in the past 12 months has taken an estimated $5billion out of the NZ economy and this will have an effect on growth and the strength of a number of businesses. For that reason the Reserve Bank has opted to drop the Official Cash Rate and it is likely it will continue to drop the OCR if prices don't improve soon.

As the Dairy Payout and OCR have dropped, the value of the NZ Dollar has dropped a lot too. Meaning that it has been cheaper for the banks to borrow funds from overseas markets. This is where they source a lot of funding for their longer term rates from, whereas the OCR is a good indicator of floating and short term rates. This is why when the OCR drops, the interest rates for the short terms and floating drop but the longer term rates don't drop automatically.

What is driving interest rates up?

Even though diary is not performing, other major export products are doing very well. Beef, Horticulture and Wine are all tipped to have record export values this year. Plus with the lower dollar we're seeing even stronger growth in Tourism. This means the economy is not under as much pressure as some would think. Which could mean the Reserve Bank won't continue to cut rates as hard as some are predicting.

With the restrictions the Reserve Bank have put in place for lending in the last few years we can see that they really do not like seeing booming property prices like we're seeing at the moment. With rates pushing lower this is only going to make this problem bigger and the Reserve Bank may choose to pause reductions in the central bank interest rate if they want to take some pressure out of that market.The US Federal Reserve has come out in the past month and suggested they will increase their central bank interest rates later this year due to their economy getting stronger. This will increase the cost of borrowings on long term rates for lenders as they fund a lot of their longer term borrowing offshore. If the NZ Dollar bounces back then we could see sharp increases in the long term rates.

So what do I do?

In our opinion the options that people have broadly fit in to two categories.

Option One

If you believe there will be further drops in the OCR on September 10th and October 29th then it would be wise to stay floating and wait to fix once short-medium term rates have dropped in line with the OCR. If you're fixed now and thinking of breaking then you could break now (as your break cost would likely increase if rates drop further) and fix after the drops.

The cost of this is that the floating rate, although dropping, is still much higher than even the long term fixed rates so you will pay more interest in the short term.

The risk of this is that rates may not drop as much as predicted and you will have the extra cost of floating without the benefit of lower fixed rates. Also a risk that long term rates will increase and you will have missed the opportunity to lock in low rates for a long term.

Option Two

Take advantage of the low rates now and fix long term. This guarantees your cost of borrowing over a longer term and makes you immune to any interest rate fluctuations in that time. We think there is excellent value in the 3-5 year rates at the moment ranging from just under 5% to 5.5%.

The disadvantage of doing this would be if the OCR drops further and the cost of long term borrowing also dropped with the above factors not having as much of an effect. Then you would be fixed above the lowest rates available.

We still think is an excellent option for people looking for long term stability, who have to stick to a budget and people who can't afford to risk the cost of major rate increases or higher floating rates to gamble on the outcomes from option one. In 9 years as a Mortgage Adviser, our fearless leader has never seen 5 year fixed rates so low and for that reason he has fixed some of his rental property loans for 5 years to lock in a guaranteed cost over that time.

Hopefully this information can help to guide you a make a clearer decision on what is the best option for you, however this is only half the story. The right option for your personal situation depends on a number of other factors and we can discuss these options with you and negotiate the best deal from a range of lenders to ensure that you've got the best option for you.

Send us an email if you'd like to discuss your situation.

Adam Thompson and the My Mortgage Team


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