We are entering a market where interest rates are the lowest they have ever been. The question most people are contemplating is: What is the best mortgage rate for my situation?
You could keep things simple and go for the lowest rate, or you could consider these three things to help make a decision.
Investment vs Owner-Occupied
Whether you live in the property or not can impact on the mortgage rate.
Some banks already charge a small rate premium on investment property, while others are still slow to change. It could pay to lock in a longer-term rate before the rules change.
Banks are being told they will have to hold more capital against investment property, which means within the next two years all banks will likely charge more on mortgages for investment property. That is why fixing longer-term becomes increasingly attractive as mortgage rates bottom out.
Choosing a longer-term fixed rate can also be helpful to forward plan cashflow. By having your investment mortgage on a longer term, you'll be able to predict your surplus personal disposable income.
When it comes to owner occupied homes, fixing at a lower rate on a shorter term is a common choice. This gives borrowers more flexibility to make changes to repayments and make lump-sum payments without incurring fees. Short-term rates tend to be a lower cost if you can handle the risk of higher rates in the future.
Appetite for risk
Your appetite for risk reflects how prepared you need to be if things don't go as planned. The biggest risk for owner-occupied borrowers is loss of income, health related issues and mortgage rates increasing.
When it comes to mortgage rates, the external reference point is the Official Cash Rate (OCR) which is set by the Reserve Bank. The OCR gets a lot of commentary when it changes, and that includes a forecast of future changes.
The OCR will affect short-term mortgage rates. One-year and two-year fixed mortgage rates will typically drop before an OCR change, in anticipation of that change.
It would be unusual for the rates to fall after an OCR change, unless there is another expected change in the future. If interest rates are predicted to fall further than expected, then mortgage rates will adjust further downward.
Over an interest rate cycle, one-year to two-year fixed terms are typically the lowest cost options. If you don’t mind your repayments changing and take a longer-term view, then fixing for a shorter term is the simplest strategy. On the other hand, longer-term rates will give you peace of mind. What is right for you will depend on your situation.
If your income is on the rise, then a rate change is unlikely to worry you. If you are about to start a family, firming up your budget and knowing your costs over the next four to five years will be critical.
Moving from a corporate role into self-employment is a big shift. Similarly, starting a family and dropping to one income can be nerve-wracking. The same goes for downsizing your job as you head into retirement. These are all considerable changes that may require you to think about your mortgage.
There are also factors to consider about the property. Will you sell it in the next five years? Maybe you’re thinking of upgrading, downgrading or even changing location. If there’s a possibility that you might sell, then opting for a short-term rate makes sense.
If you’re taking a leap of faith into the unknown, then fixing longer-term gives you some certainty and that can be a good thing.
Everyone has different needs
Picking a mortgage rate isn’t a win/lose situation like gambling. When making the decision, it’s best to think about what your plans are and what you actually need. You are most likely going to have a mortgage for thirty years. Sometimes you will get on the right side of rate changes and sometimes you won’t. If you’re concerned about your affordability or rates increasing, then fix for longer. Otherwise, keep it short term and fix for two-years along with approximately 60 percent of our population.