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Campbell Hastie: Fix, float or what?


Published: 12:54PM Friday February 08, 2013 Source: Campbell Hastie

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Worried about interest rate increases?

Forgive me: 'worried' is probably a bit strong and 'concerned enough to care' is more like where you should be when thinking about the possibility of interest rate increases.

The general consensus from those closer to the action than me (economists and other pointy heads) is that interest rate increases are on the cards for sure.

Need I remind you that the current low level of interest rates is what the Reserve Bank (RBNZ) calls 'stimulatory'.

That is - if they hadn't dropped the OCR to the lowest level in history a few years ago then the economy would probably be on its knees right now.

And with business picking up in many areas, showing gradual signs of life in others and downright rude good health for a few (real estate in Auckland and Christchurch being the obvious examples) there's no question that the RBNZ will make a conscious and deliberate decision to increase the OCR at some point.

When will rates go up?

Some people are picking as soon as mid-winter 2013 while others are expecting it to happen a little later, perhaps by December.

Personally I think it's later rather than sooner for the simple reason that human nature tends to hold off on making changes even though the signs for making change are often quite clear.

The point is - you're now on notice that interest rate increases will happen and you ought to prepare for that.

How big will interest rate increases be?

They'll be gradual, consistent and might be in the order of 0.25% maybe 2-3 times a year through until 2015.

If I'm right that's actually good news because it suggests a trend you can plan for. More than that I'd say each change is likely to be well signalled too.

What will that mean for my mortgage repayments?

Not a lot initially. But a 0.25% increase three times a year for 2 years translates into a floating interest rate approaching 7% and that will absolutely make a difference to where you're at right now.

If you're happily wombling along at 5.25% today I'd start to make changes to your spending now so you can handle any increase that comes along tomorrow.

A great start for most people is to have a written budget which describes how you plan to spend your money. The country would be in better shape if more people did this!

What should I do about my interest rate then? Fix, float or what?

It depends. To answer this question I always ask clients if they expect any changes to the money that comes into their household.

Sometimes an income will disappear for a period of time if babies come along. Maybe you're planning on firing your boss and going self-employed.

Thinking of buying a rental property perhaps? Or maybe your company pays bonuses or you're in line for incentive payments and commissions over and above your salary. All of these will impact your decision.

Fixed rate loans give certainty for a period time and there's been a bit of noise suggesting you should lock in now while you can. A fixed rate is pretty useful if your budget is tight or if you like knowing exactly what you have to pay for a set period.

And while it's true that fixed rate loans are less flexible than floating rate loans, you can still overpay, by quite a lot actually.

Westpac will let you overpay by 20%. ASB will let you pay $1000 a month more than the minimum. Did you know that? Yes, there are options out there it's just that most people don't seek out advice on what's available to them.

Having said all that fixing or floating is almost irrelevant if you don't have an understanding of where your money goes and that's where a budget comes in. Do one and answering the 'should I fix or float question' will become much easier.

Campbell Hastie is a mortgage broker from Auckland firm Go2Guys. Read more of his blogs here.