Your Money Questions Answered: Should I Break and Repair My Home Loan?
Susan Edmunds is Stuff’s business editor. Each week, she will answer your money and personal finance questions. You can send yours to [email protected] This information does not constitute personal financial advice and should not replace professional advice.
I bought a house a year ago and paid off my mortgage over two years. Now that interest rates are rising, I’m wondering if I should terminate my loan now to re-fix it for a longer period, or if I should just keep paying the good rate I’m currently at; we managed to get just under 3% – for the rest of the term and hope for the best. What do you advise?
As you have probably noticed, interest rates have risen rapidly. If you were to fix for a period of two years now, you would have a rate closer to 5%.
In dollars, that’s $1,348 per fortnight on a $500,000 loan, assuming a 25-year term, versus $1,047 at 2.6%.
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Bruce Patten, a mortgage broker at Loan Market, says the opportunity to break and fix is something a lot of people are thinking about right now.
He says the first thing to think about is how long is left to run with the current rate. In your case, it’s a year. He says that makes it a tough call.
“They will pay a premium to break and fix now… based on how long they fix. Therefore, they need to consider whether rates will rise further over the next 12 months.
“I would say most of the rate hikes have already been priced in, so other than some movement in floating rates and one and two year rates, we shouldn’t see much more of a longer term rate hike. for the moment. .”
Gareth Kiernan, chief forecaster at Infometrics, says your rate from a year ago likely didn’t factor in expectations for the hikes that have occurred over the past six months.
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“So their two-year rate is a bargain compared to today’s rates.
“The only reason you would break and fix now is that you think the market is still failing to price in the magnitude of future interest rate hikes over the next one or two years, which means that the 4.7% two-year rate currently on offer is just as undercooked as last year’s rates ended up being. In other words, do you think you know more about rates interest rates than financial markets or banks? At this point, that seems like a bold call to me.
He said maintaining your rate from a year ago could also allow you to pay off more of your mortgage in the meantime. This gives you more flexibility in the future.
“If they can’t make additional payments on their fixed mortgage without incurring penalties, they can at least pay off some additional portion of the loan when it renews, and before re-fixing it at a higher rate.”
He warned that when you come to reprice in April next year, you could be near the top of the interest rate cycle.
“It’s impossible to be certain when the spike will be, but if it appears to be, the key is to make sure they don’t reattach for too long. There will have been a lot of regret from people who chose the five-year fixed rate in 2007/08 because it was the lowest offer at the time, only to find they were still paying 9% in mid-2009 when un- annual rates were down to 5.6% and they were facing hefty break fees.