Mortgage interest rates

[frances56]

Hi there.

I read a few articles now and then about how long to fix interest rates. Currently the advice seems to split between 6 months and 1 year. I read this article however and wonder what people think.

https://www.interest.co.nz/personal-finance/128169/david-chaston-investigates-what-best-home-loan-rate-and-term-choice-might

[donna]

Hi frances56,

Ha - yes, the graphs are good - like this one. There is real correlation between the 1 year fixed and brokers' business.

For the past five years, you would have been better off choosing the BNZ four year 2.99% fixed rate than any other term from any other bank. The year before making that decision you would have been better off on the one year rate of 3.85% from one of ANZ, BNZ, or Kiwibank. Over the full five years you would have made payments of $130,299 using this "lowest current rate" strategy. That is a $14,377 saving over always going for the lowest one year fixed rate, and a $16,214 saving for always going for the lowest two year fixed rate.

Source for image and quote

It's got me thinking for sure.

cheers,

Donna

[frazzledfozzle]

I’d be very interested in hearing more from experienced investors about this.
From the little I know about these things it looks like it could be something we would consider when we need to refix off a 2.8% rate in August

[frances56]

For example, According to his theory you'd choose say westpac at 6.39 percent over 3 to 5 years, but other commentators for example Tony Alexander is recommending taking a mortgage at 6 month or one year at the mo which is 7.29 % and 7.24% respectively at Westpac.

[Engineer]

Sorry to potentially state the obvious, This is basically what we do .
Step 1. Ignore the self proclaimed experts, they won’t pay your mortgages.

Step 2. Make up a spreadsheet and start playing around with different loan amounts ( maybe split loans up) at different interest rates ( 1 year, 1.5 year, 2 year whatever) coming off fixed terms at different dates ( over the next 5 years say, or 10 years ) . Then, to be fancy add in a line for rents, a line for rates, a line for insurance and any other expenses. Obviously you need to guess how much % rents and rates ect will rise each year.

You need to guess what interest rates might be in a years time, 2 years time, 3 years time. But play around with that to see where you are weakest.
This will give you your yearly cashflows for 5 or 10 years. Different scenarios. Technically a sensitivity analysis.

If it’s looking okay, good. Then get a big overdraft facility set up anyway. Stuff always goes wrong.
If it’s not, panic. Then get a big overdraft facility set up anyway. Cover a range of possible interest rate outcomes at least a year before you need it.

[donna]

Would you bother splitting up $400K and if so across different lenders or the same lender different fixed rate terms?