re fixing

[tamara]

Hi

With the interest rates creeping up and one of our mortgages due to come off its fixed rate in August, I thought that I would ask people whether they thought it was worth breaking our current rate to re fix. It is currently fixed for 6.5% and the bank we are will are currently offering rates of

6 months - 6.65%
12 months - 6.80%
18 months - 6.75%
2 years - 7.00%
3 years - 7.15%

At the moment i think that it is worth looking to break and refix.

What do you think?

Tamara

[graemeh]

If you break the rate you are gambling that rates will continue to rise in the future. I guess another factor in your decision will be what does it cost to break (apart from paying a higher interest rate until August.

I have seen some banks (I think it was Kiwibank) where you can buy the future rate. You pay them some $$$ and they guarantee the rate you will get in August.

You say that it is one of your mortgages. What are the others doing? If you split your loans up and take a range of terms it reduces the impact of any fixed terms ending. Our loan is currently split about 25% 4 year rate, 25% 2 year, 25% 1 year and 25% floating. We did this about a year ago so all our fixed rates are just under 7%.

[tamara]

Hi Graemeh

Thanks for the response. I had not thought about the staggered approach that you have mentioned. Might be worth looking at. I will have to some more thinking.

Tamara

[graemeh]

The staggered approach is good to reduce the volatility of the rate you are paying. It works quite well at smoothing the rate long term and saves you from being hit with a major increase (although obviously the rate goes up over time).

[Monid]

Hello Tamara & Graemeh

just found out to my surprise that National allows you to reserve a rate for sixty days for free which is nice at least once you have done the figures for a new deal and are now waiting with bated breath for settlement.

certainly nice for us it seems every time we buy a place the interest rates go up just before settlement

We have staggered our loans, of course while this does shield us from ending up with having to refix at a high interest rate with all our loans but it does virtually guarentee that we will have to some of the time.

My sister in law who works as a go2 for a business banker at the BNZ telss me that the BNZ doesn't penalise you for breaking a fixed loan if they won't lose money from it ie if you move from a lower interest rate to a higher.

Might be worth pointing this out to your current bank, that they won't be losing any money... all that will be happening is that they will get more cream sooner...

Cheers David

[Vern]

Hi Tamara

Kieran might be able to help out here. I read a book that he wrote some time ago now which talked about mortgage averaging as a means of managing interest rate risk.

If you could hunt down that book it could be useful.

Regards

Stephen

[tamara]

Thanks everyone for your responses.

I have emailed my broker and might make an international phone call to my bank to make some enquires as well.

Tamara

[kieran]

Thanks Vern,

I created the concept of Interest Rate Averaging in 1997 to reduce my own interest rate risk and help others do the same. Interest Rate Averaging is an effective interest rate risk management strategy and is achieved by splitting mortgage debt into several smaller loans and then taking different interest rate terms on each loan. This means that the interest rate I am paying is NEVER exposed to any interest rate 'spike' therefore minimising my risk. Many property investors now use this concept. I wrote about it in my 1st book 'Mortgage Concepts to enhance wealth creation' and have also have written about it in my new book on the property cycle due for release by Penguin Books soon.