Long term interest rates are on the rise, so it’s a good time to think about fixing for 5 years while the rates are still good – but only if this actually works for your situation!
The main banks had been offering 5 years fixed at 2.99%, but as of February this year we are seeing the rates slowly rise. Currently the 5 year rates look to be sitting between 3.39% to 3.99% and these are expected to climb further.
Understanding your situation and intentions is a must. If you are planning on holding onto the property for a few more years, then great. Fixing for a longer term such as 5 years will give you budget certainty, as well as potentially saving you thousands of dollars in interest due to the good rates.
However if you are wanting to sell in the near-ish future a 5 year fixed term may not work for you.
If you sell a property or make lump sum repayments you are likely to incur an early repayment charge (ERC). This can amount to thousands of dollars depending on the terms of your loan and your bank’s rules. The repayment fees are typically calculated based on the remaining term of the loan, whether the wholesale rates are lower than the original wholesale rates at the start of the fixed rate period (this is basically the rate at which the bank borrowed the money for your loan, as the bank will still be paying back at that rate), and the time left on the fixed rate period.
It can seem like the banks are just making money hand over fist, and it is often hard to see why they need to charge what they do! Here is how BNZ explains the need for the charge:
When a customer takes out a fixed rate loan the bank will exchange fixed interest for floating interest in the wholesale market. This is done to match the interest it must pay on the money it borrows (from its depositors or other banks) to fund loans to customers. In return for offering the customer certainty of interest rates, the bank requires certainty of income.
Suppose a customer repays the loan before the end of its fixed rate period, and relevant wholesale rates have fallen at the time of the proposed repayment. The Bank is still committed to pay fixed interest to the depositor (or other bank) for the remainder of the fixed rate period but is no longer receiving its fixed income from the customer. The early repayment charge calculates the loss to the bank arising from this.
There are some circumstances in which breaking the loan may still be the better option. For example, if you have inherited a lump sum and want to clear your mortgage, the interest you would have paid over the term of the loan may be more than the ERC and therefor you could still save money by breaking the loan.
Have a pay with this break fee calculator to get some understanding of your situation.
As always, everybody’s situation is different, please ask us to walk you through your options. That’s what we’re here for – to support you to make the best financial decisions for your personal situation. Book an appointment at the Calendly link at the bottom of the page, or send us an email.