Refixing the mortgage? Should you float or fix – and for how long?

Last week’s Official Cash Rate (OCR) cut sparked another cycle of banks dropping mortgage rates. But for homeowners due to refix soon, is now a good time to grab those fixed rates?

Cameron Marcroft, senior adviser and director at Loan Market, told the Herald it felt like we were nearing the bottom of the interest rate cycle.

“I wouldn’t float now, I would definitely fix,” he said.

“The rates are good at the moment. There’s no guarantee they’re going to go lower.”

Marcroft said when consumers are sitting on floating rates at higher interest, the advantage of waiting for lower fixed rates can be taken away.

“Getting stability in your borrowing is really important right now,” he said.

“We’re into the 4.8s now for those shorter-term rates… I don’t see much [lower] than that.”

Marcroft said one and two-year rates have probably been more popular.

“The three-year rate has started to become semi-attractive for some borrowers now.”

The five biggest banks all currently offer special two-year fixed rates below 5%.

“Under 5% for two years is not a bad interest rate,” said Nathan Miglani, managing adviser at mortgage broker firm Squirrel.

He expected to see 4.99% for three years soon.

“That was acceptable by people for so long and everyone is actually pretty happy to fix it and don’t have to worry about it for another three years,” Miglani said.

Banks have responded to the recent Official Cash Rate cut by dropping lending rates. Photo / 123rf

He said clients were not keen to float their loans for too long.

“I think the interest rate in floating is still pretty high compared to fixing for one year.”

Miglani also said we were nearing the end of the current interest rate cycle.

“[The] bottom of the interest rates will be by the end of this year,” he said.

“We’ll definitely see one [OCR cut], maybe two by the end of this year.”

The Reserve Bank of New Zealand (RBNZ), which cut the OCR by 25 basis points to 3.25% last month, will next meet in July.

Should I fix for short or long term?

Miglani said whether homeowners fix for a short or long period depended on the size of their mortgage.

“If their mortgage is under $250k-$300k then maybe fixing for one year is actually not a bad option,” he said.

Those with mortgages over half a million dollars should split their loan, Miglani recommended.

“If their lending is around $500k-$600k, then splitting the loan into maybe $150k-$200k for six months, $250k for one year and $250k for two years,” he said.

“If their lending is around the million-dollar mark then strongly suggest [they] have a chunk of it fixed for two years.”

Loan Market’s Marcroft said for people with a lot of debt, it was important to have a portion on a longer term rate just to hedge their bets more.

“On average, I’d like to have at least two different fixed terms on a mortgage, whether that be a one [year] and two or one and three, along with an offset or revolving credit being the vehicle to pay off the mortgage faster,” Marcroft said.

Cameron Smith is an Auckland-based journalist with the Herald business team. He joined the Herald in 2015 and has covered business and sports. He reports on topics such as retail, small business, the workplace and macroeconomics.