Here's how to save money on your mortgage

Tuesday, 18 September 2018

With warnings of another Great Depression just around the corner and falling business confidence, it might be tempting to lock in the safety of a long-term home loan rate.

But economists say that would be the wrong move, if you want to save money on  your mortgage.

Average fixed-rate mortgage interest rates have fallen over the past month.

The average special rate has fallen on three-, four and five-year rates. The longest terms have fallen the most, down more than 30 basis points, on average.

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ANZ's economists said, while that made fixing for a longer period more attractive, the value still did not stack up.

 'Our favoured borrowing strategy is unchanged in that we think the one-year fixed rate is the sweet-spot,' they said.

'It remains the lowest point on the curve, but also provides a short enough duration to quickly benefit if the Reserve Bank were to cut the official cash rate (OCR) again, which we see as a non-trivial possibility. It also is a far cheaper option for borrowers than floating rate exposure, which maintains a large cost pick-up to shorter fixed rate terms.'

They said the average one-year rate would have to rise to more that 4.65 per cent in one year's time, from 4.27 per cent now, to make locking in a rate for two years worthwhile.

'That is not a large move by historical standards, but it is certainly inconsistent with our new expectation for the OCR – that is, on hold for a considerable period. There is also an added benefit from keeping borrowing shorter in duration: you maintain the flexibility to take advantage of the possibility of lower rates in the future were they to eventuate.'

Mortgage adviser Tony Mounce, of Tony Mounce Mortgages and Insurance, said he had long favoured the annual rollover strategy, of locking in a series of one-year rates. It was a good control mechanism, he said. 'It's typically the lowest rate.'

If conditions started to change, it offered enough flexibility to respond.

Banks usually only charge break fees in an environment where rates are falling. Mounce said, if borrowers saw the OCR start to lift, they could quit their one-year rate at minimal, or no cost and fix for a longer term. They would typically only miss one OCR increase of 25 basis points, that way.

Annual refixing also allowed borrowers to increase their repayments if they had a pay rise, or pay off a lump sum.

Economist Cameron Bagrie said he backed a one-year rate, too. 'It's the cheapest, and with so much uncertainty over the outlook for interest rates, it strikes a good balance between interest rate cost and flexibility.'

But ASB chief economist Nick Tuffley said it was also worth monitoring the longer-term special rates. 'They offer good value, though one downside is they would limit the ability to benefit if the Reserve Bank actually cut the OCR. '

How much do you pay?

If you have a $500,000 mortgage over 25 years:

4.27 per cent: $1252 a fortnight

4.5 per cent: $1282 a fortnight

5 per cent: $1348 a fortnight

5.5 per cent: $1416 a fortnight.