Yes, you won’t be surprised to know that interest rates continue to dominate conversations with my clients, and one question keeps coming up: “Should I fix for six months or twelve months?” While we’ve discussed this before, we now have actual history of falling rates to compare, (see my chart below), allowing us to look at real numbers rather than just speculation.
Current market conditions
If you post that question (or a version of it) in a Facebook group, I guarantee you’ll get 500 armchair critics giving you their two cents. Importantly, not one of those critics will say, ‘Tell me about your situation.’ Instead, they will launch into what they think you should do without considering your situation or needs. Their advice (if you can call it that) is usually to rattle off what they’ve done themselves—which is great for them but probably not for you!
For example, a client recently told me she read somewhere that rates would drop by 2% in about a year, so she wanted to fix her loan for just six months. I pointed out that her loan was only $30,000, and a 2% reduction would only save her $1 a month. Plus, she only had two years left on the loan. I recommended fixing it for the remaining two years for simplicity, which she did. Hers is an unusual situation, but my point is, context makes a difference, and each situation is different.
Splitting your mortgage: certainty is key
- Interest rates are declining (12-month fixed is around 5.59%, Floating rate is around 7.89%)
- Multiple rate reductions expected in coming months
- Rates are unlikely to return to previous historic lows
- Bank stress test rates have decreased, increasing borrowing capacity
Various market commentators have consistently advocated for people to fix for six months, anticipating swift interest rate falls. Their logic seems sound—fix short, then capitalise on better rates at your next fixing. But the same commentators haven’t changed their tune over the past six months, maintaining their “fix short” mantra despite evolving market conditions.
Here’s our take on it
While this strategy has merit and, on the face of it, makes sense—after all, who wouldn’t want to catch falling rates—our analysis suggests a different approach. We’ve been recommending clients consider 12-month terms instead of six, and there’s solid mathematical reasoning behind this advice.
Why? For the six-month strategy to work in your favour, rates need to drop significantly in a very short period. Let’s break this down with some real numbers. Consider a $100,000 loan with a March 2024 refix date. If you choose a twelve-month fixed term, your total interest cost would be $6,890. However, if you opt for six months, with your next refix due in September 2024, your total interest cost over the same twelve-month period would be $7,020.
Have a look at the data below, showing the actual picture over the last year:
Now, you might be thinking that a $130 difference over twelve months is peanuts—and you’re right. For a $100,000 loan, it’s a small amount and might be worth the punt since the result could have been different. However, here’s where it gets interesting: to break even on the six-month strategy, you’d need the six-month rate to fall to 6.59% by September. For the gamble to actually pay off, you’d need rates to drop even further to at least 6.49%. As it turns out, 6.49% has arrived, but it took another 2 months to show up—in November 2024, not September 2024. In the context of our example, the 1-year term is the better choice. Hindsight is a wonderful thing, but I hope this proves the point. Get some advice (from us!) before you make a decision.
This becomes even more significant when we consider that many of our clients have mortgages ranging from $500,000 to $1 million. For these borrowers, that small $130 difference suddenly becomes $650 to $1,300 – a much more substantial sum that makes “taking a punt” considerably harder to swallow.
The current market presents an interesting scenario. We’re seeing 12-month fixed rates around 5.59%, while floating rates hover at 7.89%. Yes, we expect multiple rate reductions in the coming months, but it’s important to understand that these changes will be gradual. As one of my colleagues aptly put it, “It’s not quite glacial movement, but it’s not the click of a button to buy pizza either.”
Looking ahead
It’s also important to recognise that interest rates aren’t likely to return to the historic lows we’ve seen in recent years. This new reality requires a different approach to mortgage strategy. While bank stress test rates have decreased, increasing borrowing capacity for many, the focus should be on sustainable, long-term planning rather than chasing the lowest possible rate.
Looking ahead to 2025, we already see signs that longer terms (18 months to 2 years) might become more attractive. This shift reflects the market’s gradual stabilisation and the potential for rates to find their new normal. For many borrowers, maintaining a small portion on a floating rate, while fixing the bulk of their mortgage provides both stability and flexibility.
One of my clients recently demonstrated the importance of running the numbers. He calculated that floating his loan until December would cost about $1,400 more in interest compared to fixing it immediately. While the potential for rate decreases was tempting, the certainty of known costs won out in his decision-making process.
Your unique circumstances
Remember, these decisions don’t exist in a vacuum. Your personal circumstances, loan size, risk tolerance, and financial goals all play crucial roles in determining the best strategy for your situation. While market commentators might offer general advice, they can’t account for your specific needs and circumstances.
The key takeaway?
While trying to time the market and catch the lowest possible rates is tempting, the cost of getting it wrong can be significant. Instead of following general market commentary, get specific advice tailored to your situation. After all, when it comes to your mortgage, certainty often proves more valuable than the possibility of saving a few dollars through perfect timing.
Let us help you cut through the noise and make a considered decision based on actual numbers rather than market speculation. Click here to find out more.
