What’s the best interest rate strategy?
This question of what’s the best interest rate strategy has been something many homeowners haven’t considered for a while. I mean who needs to think hard on that one when the rates are falling month upon month (for years)!
But it is a question that should start ticking over as 2021 progresses. Because, over the last few weeks we’ve seen a couple of changes that could impact the interest rate you pay on your mortgage.
The first is a hint of inflation.
It wasn’t very much and it could just be a blip, but given that inflation has been running right at the low end of the RBNZ’s target zone for a long time, this was something I noted the other day.
Remember that the RBNZ’s job is to keep inflation within a 1-3% range. When inflation hits the top end of that range the RBNZ increases the OCR and that tends to push the floating and short-term fixed interest rates you and I pay up.
We’ve had stuff all inflation in recent years and that’s part of the reason why interest rates have been falling (not to mention the more obvious calamity which is C-19). The thinking is that if you make it cheaper to borrow money then people will do exactly that, they’ll spend it and as that spreads itself round the economy it generates a bit of inflation.
There’s certainly a lot of money sloshing around at the moment and people are spending it – maybe this is what drove the little inflationary blip. Anyway, it’s the kind of thing people like me take notice of.
In the last quarter or so, we’ve also seen some hardening in longer term interest rates.
Some people have even asked if the pattern of falling interest rates has begun to bottom out. And if it has bottomed out then can we expect rates to rise?
I don’t want to speculate either way because I’m pretty useless at picking these things. So is everyone else by the way!
Actually, it’s much more useful to think about how you might deal with changing interest rates – irrespective of their direction.
For me, that means hedging your bets. This is exactly what I do for my own mortgage and I think it stands people in good stead, so I often have people consider it.
Most people want certainty.
They want to know what their repayments are going to be month in month out. For them, a fixed interest mortgage is the way to go.
My twist on this is to split your mortgage into a couple of pieces and fix the interest rate on those pieces for different periods. Maybe half fixed for one year and the other half fixed for two years. There are many combinations you could try, but the benefit of splitting is that if rates rise then you only face the increase on half your mortgage and you get time to adjust for the rest.
It’s not quite as good a strategy if interest rates fall because you have to wait a year to pick up on the benefit of a lower rate. However, you still have the peace of mind of knowing what your payments are and that’s pretty reassuring. And it probably doesn’t matter too much when rates are pretty low to start with.
Well, you could waste a lot of time fretting over finding the very lowest rate and jumping ship to get it. But the key message is not to worry too much about what those interest rates are doing. In all my time in the mortgage and finance world, I think you’re far better to think about how you’re going to manage your mortgage payments instead. That is a mortgage strategy that works.
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