It’s no secret that the mortgage market is confusing and full of technical jargon. To say that its not user-friendly would be an understatement. That said, when you examine the options before you side-by-side it can help the bigger picture come into focus.
When examining potential mortgage packages, one of the major factors is the decision to fix or float.
Fixing is whereby you ‘lock-in’ a specific interest rate that will last for a set period of time- usually anywhere between 6 months and 5 years. Currently you can expect to pay from around 5.25% to 6.45%, with the longer loan periods being at the higher end of the scale.
Floating or variable interest is whereby the interest rate being paid is variable, and will fluctuate over the loan period in relation to national interest rates. Currently the median floating interest rate is 5.85%.
As you are likely aware, the differences in these two types of interest are huge, and can result in savings (or losses!) of thousands of dollars, particularly in a fluctuating market as we are experiencing at the moment.
But what to do?
If you asked a financial commentator a year (or even six months ago), there’s a good chance they would have said floating without a second thought. The market was at its prime, and interest rates were falling to record low levels. That said, these days the market isn’t so clear cut.
Some economists are predicting that the end of the global financial crisis is nigh, although predictions vary as to when exactly, if indeed at all. Currently New Zealand’s economy appears to be improving steadily, in contrast to the ongoing setbacks experienced in America, and the continued recession in Europe. However, with our reliance on other economies for trade, our own improvements are being hampered by the financial situation of overseas nations, the inevitable rise of the OCR (Official Cash Rate) is likely to be delayed until late 2013 or early 2014.
For this reason, the future of New Zealand’s interest rates are incredibly difficult to predict. Low end predictions state that interest rates will remain the same until at least mid 2014, others predict a rise between 3 and 3.5%.
Every mortgage has an inherent risk, and in the changing climate this is simply amplified. Online calculators will help you in working out the cost of how much you will pay if you remain floating in each of these scenarios, or if you fix.
That said, there’s more to it than simple math.
After all, a major factor in any mortgage is the lifestyle and values of those involved, as discussed here – your financial goals, budgeting and willingness to play the odds are all a factor.
The bottom line on mortgages
The times are changing- and a fixed mortgage, or at least a split mortgage may be the way to go. Furthermore, these are already the cheapest on the market, and there is speculation that a fixed-rate price war may soon be in the works.
If a mid range term is preferred, then fixing is not a bad idea. Whilst fixed rates are still consistently below floating rates, even if interest rates continue to fall you won’t miss out!
Alternatively, if you are looking for a longer term period a mix of both floating and fixed on different portions of your mortgage is likely a better idea-forecasts are so uncertain that this seems like the best option from a risk management perspective.
No matter your preferences, talking to a professional is always a good idea. This information is designed to be generalized, and personalized expert advice is always advised before undertaking such a large financial commitment.
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