These views expressed are my own opinion. I hope
this article provides a foundation to some thought around what your
plans are for your mortgage and budget / spending
plans.
If you find yourself thinking:
I know I should do something about this but haven't quite had
the mental space to figure it all out. I've still got a bit of
time, I'll get to it after the [xyz] is done…
...well, here are a couple of quick pointers on choosing fixed
or floating interest rates that will help steer you in the right
direction for yourself.
With my old Banker's hat on, I would ask you the following
questions:
What is your appetite for risk?
You'd say, "What?? I don't know. I don't want to take any
unnecessary risk, I just want to float as long as possible and then
fix when the rates start to go up."
How sensitive is your budget to any future interest rate
movements' impact on your disposable income?
"My what to what??"
Let's try that again!
How much is it going to hurt when the interest rates come off
these historical lows and start to head back to the 7%
average?
If you are unsure, then pop onto your bank's website. There will
be a home loan calculator which will help your work out what the
payments will change to.
If the answer is, "It'll hurt a lot more" then this
might move you to make a decision sooner rather than waiting for
everyone else to make the first move.
If the answer is, "It's OK, I know how much it'll cost me
moving forward and I'm prepared to wait it out", then you've
made your informed decision. Mentally you can tick that
I've-reviewed-the-mortgage box and move on.
What are your financial goals and how quickly do you want to
pay off that mortgage?
Perhaps you are thinking, "Hopefully sometime sooner than
the 20 years I took it out for". Well, if that's the
case, it will take some discipline with the spending, managing
within the household budget and having a good mortgage broker or
banker on your side to help you achieve that goal.
In the current market, approximately 70% of people are floating.
Never in our history have Kiwis been so keen on floating rate
mortgages. That's usually been the Aussies.
Something to remember:
When the rate hikes commence they will have an immediate impact.
Banks will follow and raise their rates reasonably promptly. By
this time the 2 year, 3 year, and 5 year rates may well have moved
on and also be higher by the time it comes to fix.
One of the other risks to factor in is that all that craziness
that's going on in the USA, Europe and the UK affects the wholesale
interest rates, and therefore influences the retail interest rates.
I still see this risk as being high; it's going to take some time
to sort it all out.
Remember that the banks love mortgages, and to some degree the
longer the mortgage, the better - yes, that's right, because it
means more revenue for them.
Useful Sources
Try using this handy calculator to work out what's best
for you.
If you are unsure what the rates are at the moment, then have a look at this page (I'm sure many of you
already do).
The Unpredictable
It was actually back in February that I originally began writing
about this dilemma, i.e. when to change to fixing the rates… just
before the second large Christchurch Earthquake. This then forced
Dr Bollard to cut rates. It does highlight the external risks at
present!
What's important to us all individually is knowing how much is
going out each month and how we can be smart about it. It can be a
bit stressful balancing the budget these days and having some
certainty around what the mortgage is costing can be rather
helpful.
Budgeting
One last thing, for those of you out there who'd like a quick
brush up on budgeting (or spending plans as I prefer to call them)
then have a look at this website . There are free courses being
run around the country. They are practical and effective and worth
investing 3 evenings over 3 weeks.
About Fiona Whyte
I love sharing knowledge
and find that most of my work, through business and voluntary work
is in the financial literacy area now. I am a former banker from
ANZ with 23 years experience, all in customer facing roles. I am
now working with
Tax Debt Brokers where we help people come to a resolution with
Inland Revenue regarding their Tax Arrears. I facilitate a CAP
Money course on a voluntary basis and also visit Cambodia regularly
to help children learn the basics about banking, budgeting and
savings.