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.