Home loan refix dilemma: Lock in now or wait for rate falls?

Homeowners anticipating a drop in mortgage rates are advised to secure two-year fixed deals. Photo / 123rf

• Borrowers refixing home loans should consider the 4.99% two-year rate as the most stable option.
• ANZ economists warn that further significant falls in fixed mortgage rates are unlikely.
• Choosing between one-year and two-year rates depends on expectations of future rate drops below 4.69%.

By Susan Edmunds of RNZ

Borrowers refixing their home loans right now need rates to fall significantly to make waiting, or fixing shorter, a better option than locking in the cheaper two-year option.

The big banks are all offering a rate of 4.99% for two-year fixes, while the one-year rate varies between 5.19% and 5.29%.

ANZ economists said the two-year rate had fallen by 2.06% from its peak but the OCR had only been cut by 1.75%.

The extra drop reflected the fact wholesale interest rates had fallen in anticipation of further OCR cuts.

They said that meant the two-year rate might not fall much further after future cuts.

“We are not anticipating significant further falls in fixed mortgage rates. Like financial markets, we expect the OCR to go lower – we are forecasting three more cuts, taking it to 3% – but since the cuts are already factored in to our two to three-year wholesale interest rate forecasts, the delivery of those cuts won’t have a big impact on our forecasts.”

They said for borrowers trying to time their fixes right, the question would come down to what it cost them to wait.

“If, for example, you are floating, waiting for rates to fall, every month you wait is another month you’ll be paying 6.89% rather than, say, 4.99% if you fixed for two years.

“On a $100,000 loan, that extra cost is $158 per month. That is an expense that may be worth paying if you envisage large falls in fixed rates.

“However, when you consider that the dollar amount that you may save over the full term on that same loan for a 0.1% reduction in the two-year mortgage rate is $200, you need to be confident of falls in the order of 0.08% per month in order to make it worthwhile staying on floating with a view to fixing later at a lower rate.”

They said people choosing between a one-year and two-year rate and only worried about finding the cheapest option would only choose one year if they thought the one-year rate would have fallen below 4.69% by the time they came to refix.

“That’s because over a two-year period, fixing for one year at 5.29% and another year at 4.69% or lower will cost less than fixing for two years at 4.99%. But is it reasonable to expect the one-year rate to fall by another 0.6%, to 4.69%, if the OCR is only expected to fall to 3%? It does seem like a big ask, and it is – by definition – uncertain, whereas the 0.3% you’ll save on a two-year, over a one-year, is guaranteed.”

ANZ’s economists said it could come down to how averse people were to risk . “Given myriad uncertainties locally and globally, we always think it makes sense to consider spreading borrowing over several terms.”