Mortgage rates are falling, so should you fix or float?

Monday, 14 October 2024

The Reserve Bank has cut the Official Cash Rate by 50 basis points, dropping it to 4.75%. The move has triggered immediate interest rate reductions across major banks, giving homeowners a break ahead of the holiday season. Zane Small reports.

With mortgage rates falling and the gap between fixed and floating rates closing, borrowers coming off fixed terms have a decision to make.

As of Friday, the gap between the floating and six-month fixed rates at some banks was less than 0.5%.

But mortgage advisers say those considering a floating rate should do so only temporarily.

To fix or not to fix? That is the question facing mortgage holders as interest rates continue to fall.

The Reserve Bank reduced the official cash rate by 50bp on Thursday, taking the rate from 5.25% to 4.75%.

Squirrel Mortgages founder, John Bolton, says those coming off fixed terms should float, but only temporarily. (File photo)

And banks wasted no time responding with mortgage rate cuts ‒ Westpac, ASB and BNZ all cut floating home loan rates by 0.5% within an hour of the OCR announcement.

As of Friday, the gap between the floating and six-month fixed rates at some banks was less than 0.5%. At Kiwibank, there was no difference between the two, which both sat at 7.75%.

The closing of that gap left a large proportion of borrowers with a decision to make.

Reserve Bank figures showed 66% of existing loans were due to roll off fixed terms in the next twelve months.

Squirrel Mortgages founder John Bolton said those coming off fixed terms should float, but only until after the November OCR review.

“Floating rates are still high so it should only ever be a temporary move. It will be increasingly tempting to fix.

“We are starting to see one-year fixed rates below 6% and expect to see longer-term rates break below 5% by Christmas,” he said.

Rodney King, partner at Loan Market Agile, said interest rates were expected to keep falling for the next 12 to 18 months before finding their next low point.

“Floating to wait for a lower fixed rate can therefore quickly become a fools game ‒ at what point do you then fix?

“The higher floating rate can quickly neutralise any savings by waiting and hence the six- or 12-month fixed rates may prove to be a better play unless looking to floating for only a very short time period until the next OCR and possible rate reduction.”

Seeking professional advice was important for anyone coming off a fixed term, King said.