Short terms for the long term

Short term, long term, fixed or floating?  Which way will interest rates go next, and for how long? These are a few of the dilemmas facing borrowers looking to refinance their mortgage or negotiate a new one in the current climate.

Future Official Cash Rate (OCR) cuts are possible, but the impact on mortgage rates will be minimal, according to the latest Home Loan Rates Report from ASB.

ASB Chief Economist Nick Tuffley says that low floating and short-term rates are now more appealing than long-term rates, which have already lifted significantly.

“We noted in the past couple of Home Loan Reports that it was around the point at which rolling into long-term rates was a good option to ensure the dramatic plunge in rates got locked in for a considerable period”, Tuffley says.

“Financial market developments and the sheer volume of shifts into fixed-rate mortgages have driven long- term wholesale rates dramatically higher in a short space of time, closing the window on attractively-priced long-term rates very abruptly.”  

The report shows that long-term fixed rates still offer a high degree of security, though at a high cost relative to very low short-term rates. 

Instead of the clearer option to fix for long terms at low rates, borrowers now have to think through several possible options: 

  • remain floating in case long-term rates subside to a degree;
  • fix for a short term (e.g. 6 months or 1 year) to take advantage of the cheapest rates on offer; 
  • fix for the medium term (e.g. 2-3 years) at a relatively low rate to gain some certainty; or 
  • take the certainty of a long-term rate even if the rate is no longer as advantageous as it has been recently. 

It’s important to consider your options in light of your specific circumstances and goals, and in consultation with a good mortgage broker.

This will give you the best chance of selecting the option that will work most effectively for you.