Private property issue #123 - What interest rate should I choose?

The Reserve Bank dropped the OCR last week. Since then, banks have slashed their interest rates.

ANZ dropped their 1-year rate to 6.45% and their 18-month rate to 5.99%.

Their 18-month rate has dropped 1.16% since the start of the year.

That could save you $134 a week on a $600k mortgage (interest-only).

There have been so many cuts that my team just launched an interest rate cut counter.

We released it in partnership with OneRoof, and it just came out this morning.

How long should I fix my interest rate for?

With rates declining, many investors ask: Should I fix it for 6 months or 1 year?

The logic is:

“The 6-month rate is more expensive than the 1-year rate.”

“But if rates are falling, taking a higher rate today might make sense if I can get a really cheap rate next year.”

So, let’s run through the math. Right now, you can get:

• 6.45% for the 1-year rate
• 6.89% for the 6-month rate

So how do you decide? Here’s an easy way to think about it.

Locking in for 6 months only makes sense (cost-wise) if, after those 6 months, you can get an interest rate of 6% or less.

If you can do that, your average interest rate (for the year) will be lower than the current 1-year rate.

If in 6-months you get a rate lower than 6%, then well done. Fixing for the short term made sense.

But, if in 6 months you get a rate above 6%, then waiting for lower rates didn’t work. You end up paying more overall.

So, ask yourself: “Do I think interest rates will be less than 6 % by February 2025?”

The good news is that ANZ releases interest rate forecasts that can help.

They think the 1-year rate might be as low as 5.6% by March 2025 and 5.3% by June 2025.

If they’re right, then there’s a logical case for that 6-month rate.

Now, I hate to admit it. Because I usually just blindly lock in the 1-year every time. But I can see the argument for a 6-month fix.

Should I just go for the floating rate, then?

Some investors will then ask: “Well, if fixing for 6 months may make sense. Should I just leave my mortgage on floating?”

The answer is ‘probably not’.

The floating rate is about 8.39%. So let’s say you leave your mortgage on floating for 6 months. And for simplicity, let’s say that the rate doesn’t change.

After those 6 months, you’d need to get a 4.86% or less for the floating rate to make sense from a cost perspective.

Interest rates probably won’t dive that far by February 2025.

So, I don’t see an argument for floating your mortgage for any sustained period.

Don’t knock the 5-year rate

Now, here’s a curveball.

Almost all mortgage advisers will tell you not to touch the 5-year rate with a barge pole.

And for most people, that’s true.

But I’m also seeing an argument for locking in for 5 years.

After all, the best 5-year rate right now is 5.69%.

If you’re someone who’s 5 years away from retirement and values certainty, a longer-term fix could make sense.

Now, I’m not saying everyone should jump on the 5-year bandwagon. Most people shouldn’t.

But your personal circumstances will impact the interest rate you choose.

So, what interest rate should I choose?

The general rule is if you think interest rates will go up, you fix for longer.

If you think rates are going down, fix it for a shorter time.

So, most people will choose to fix shorter, even though the short-term rates are currently higher than the long-term rates.

After all, the goal isn’t to just get the lowest rate today. It’s to get the lowest average over the next few years.

That higher 6-month rate today might save you money over the next 12 months.