My money is on the 1 year rate!

Fixing interest rates for 3 years could cost you more money than fixing them for a 1 year term over 3 consecutive years.

The following illustration demonstrates what I mean and why I have my money on the 1 year fixed rate.

This illustration indicates that if you fix your interest rates for the first year at 5.49%, and the rates increase by the expected 0.75%, in the first year, then you will fix the second term at 6.25%. Even if the rates in the second year increase by a whopping 1.71%(which seems unlikely), you will still be better off fixing for your third year at 8%, than fixing it at the 3 year rate of 6.6%!

1 Year Fixed Rate 3 Year Fixed Rate
Year 1 5.49% 6.60%
Year 2 6.29% 6.60%
Year 3 8.00% 6.60%
Total 19.78% 19.80%
Average Rate 6.59% 6.60%

(Note: The rates in the above table are an average of the banks’ published rates; these are not the rates that we get for our clients. The same result applies if you get discounted rates on year 1 and year 3. Come and see us to ensure you get better rates than the table above.)

How long should you fix your interest rates for?

This is the hot topic being talked about at the moment. The Reserve Bank has been hinting for a while that the OCR rate will increase, with the latest indications suggesting that it will happen in March. So how does this affect you and what should you do?

My recommendation will always depend on your individual financial situation and the current market conditions. Unfortunately, there is no magical right answer for everyone, so please consult with me before making any decisions as my advice could change next week. However, my advice is that if you cannot afford any rate increases beyond expectation then don’t risk floating most of your mortgage or opting for short-term fixed rates. Take the safer option and fix your mortgage at a term that would give you certainty for a specified period.

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Buying in the property market is tight at the moment, which is why it’s such big news that you can get 95 per cent finance to build a property.

We can help you source finance if you want to take the plunge and invest in building your dream house.

As always, give me a call if you have any questions.

Nick 0211 9444 24