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To Fix or Float?

To Float or Fix: The Million Dollar Question

By Mike Uganecz

When we put together our structured loans, it?s always a carefully thought out mixture of fixed and floating loans. We keep an eye on what the market and interest rates are doing and put a strategic package together that balances between getting the lowest rates and future proofing.

So far this year the strategy has been biased towards a sinking rate market. We?ve been seeing interest rates remain static or drop with each review of the OCR by the Reserve Bank, mainly to try to stimulate inflation. I know many commentators have quite short view horizons and were tending to use language that supported a view that this would continue for some time, but I read a very interesting article in the NZ Herald yesterday (usually a source of poorly written sensationalist stories, in my opinion). The article sited Rodney Dickens, a former member of the Reserve Bank?s Monetary Policy Committee, as writing in his newsletter that the common view of economic forecasters that rates won?t rise any time soon is ?off the mark?. Dickens writes that the odds are high the current housing boom will be ?undermined by rising interest rates?.

In my opinion, this has an element of ?stating the obvious?. The housing boom won?t continue forever and the most likely thing to cause it to stall will be rising interest rates! Of course we see rampant borrowing when the cost of money is at record low levels, and if rates go up then we will see a cooling of that borrowing, which would likely impact the housing market. What Dickens doesn?t seem to say is when this will happen. It could be later this year, or it could be 5 years from now. And that variation in the time horizon is what makes all the difference when it comes to fixing or floating your home loans!
In reality, I think our low inflation is what will continue to drive the OCR rate decisions, but I certainly will be structuring loans with an eye to rate increases within the next year or two.

What all this commentary does suggest to me though, is that right now is probably the bottom (or very very near the bottom) of the OCR. That means there has never been a better time to refinance or renegotiate your home loan portfolio. Even if you are halfway though a two year fixed term loan, it could be well worth breaking that loan and taking advantage of today?s rates.

I?ll just leave you with another thought. Many people only think about talking to a mortgage adviser or their bank when they are buying or selling a house. I?d argue that the best time to look at your mortgage structure is when you are not buying or selling! You are less stressed, there are no time pressures and the banks are very keen to have a look at moving you over from another bank. It?s a great time to negotiate a new loan, or better yet, have us negotiate it for you.