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Fix or Float, the Question of the Day

AUTHOR: The Professional Trustee Team

POSTED: 23 September 2013

What an interesting time we've been having in the land of money. Seems all the points in my last blog about LVRs (August 2013) are coming true.

The Reserve Bank has used its new toy with all the effect I predicted occurring. Two of our biggest lenders have pulled their prior loan approvals this morning, leaving many borrowers worrying. And the big question on the top of everyone's grey cell list is 'do we fix or do we float?' It was definitely a question I was pondering myself and so last week, I set about doing a little research.

HAPPENINGS OVERSEAS
First up I wanted to look at what was occurring in Europe because these countries can have a bearing on New Zealand's economy and our own interest rates. As best as I can tell, Europe will continue to womble around for some time to come. This in part is because Europe is run (to a large extent) by a committee of countries and as we all know, the more members that sit on a committee, the harder it is to gain consensus on any course of proposed action. That aside, Europe seems to get itself together at the 23rd hour and 59th minute, so on the basis that things do become a bit harder over there before they solve their financial issues, I think we probably need to just push along and make the best decisions we can, whilst taking into account the fact that their problems will beseech them for a while yet and can have a run on effect over in Kiwi land. Why is this so? Well, put simply, if our banks have to pay more money to borrow funds from Europe, when our banks lend that money on to us Kiwi borrowers, we'll end up paying higher interest rates. So I'm factoring this piece of information into my decision making.

HOME GROUND IN THE LAND OF THE LONG WHITE CLOUD
Next, I looked at our own economy. What would the Reserve Bank do in the next 6 months I asked myself? I'd already looked at this in a bit of detail when I wrote my last blog 'How the Reserve Bank's New Toy can Affect Home and Investment Property Ownership'. Because of the research I'd done for this article, I was really just updating my thinking. For a whole host of reasons that I'd canvassed in that article and in my last seminar on the Auckland Unitary Plan, I'd already concluded the Auckland property market wouldn't be cooling any time in the near future. This was despite the valiant attempt by the Reserve Bank to bring that effect about through the use of their new toy aka the introduction of the loan-to-value ratio (LVR). So given the Reserve Bank's workings and the potential failings, I decided overall that it was more than on the cards they'd go a step further and act to push up the Official Cash Rate (OCR), and that in itself (irrespective of the Europe situation) would lead to an increase in interest rates.

A LITTLE MORE ANALYSIS
Given the above two pieces of thinking, it seemed pretty clear to me that interest rates would rise and I didn't want to be caught in the trap of paying more than I had to. So was fixing now the right thing to do? A little more application of grey cell matter was required.

By doing some more analysis work, it turns out that you can fix your mortgage right now, possibly at an interest rate lower than what you are already paying, and this in itself can save you funds. But then you need to balance that fact alongside the penalty interest you pay if you are repaying a fixed mortgage right now. To work out what way the numbers fall, you need to do some calculations. For my part, I ran the calculation through the Interest Rate Break Cost Analysis Tool we have at GRA (available from the Free Resources section of our website) and hey presto, it turns out I'd still be ahead if I broke my fixed loan and locked my loan in right now.

Finally, I needed to consider what would happen if I did lock my interest rate in now and if I did actually sell my property before that fixed term mortgage expired. This is where things get interesting. On the basis that the mortgage rate I locked at is lower than the mortgage rate at the time I sell and repay my loan, there shouldn't be any penalty interest to pay. There may well be a break fee but overall, things should even out. If that turns out not to be the case, I may still avoid paying the penalty interest that is charged to me, if I take out another loan with the same lender. Seems I'd be able to keep my existing mortgage rate as well, although I would need to pay the rate of the day on any borrowings I make over and above the existing borrowings I'd taken out. And if that option wasn't available for me because there was a delay between the sale and the new purchase, the term deposit-mortgage ongoing option would work for me. It goes without saying I wanted to see these points in writing from my proposed lender but on the face of it, given these pieces of information, my decision was made. I was going to fix and I was going to do it right now before rates moved.

With the decision made, I practiced what I tell all our clients … I instructed a mortgage broker to help me. After all, it's their area of expertise to do battle royale with the banks. They can get a far better deal than I can and it was a sharp deal I was wanting to make.

WELCOME TO THE STAGE MR BROKER
This was an enlightening exercise in itself. I approached my bank where I have my current mortgage and asked them what rate they'd lend me funds at. I was quoted x%. My mortgage broker gets involved and he gets a mortgage for me at a lower interest rate than what I was quoted. How this happens I don't know. Go figure.

CONCLUSION
Answering the question whether to fix or float requires research, analysis and you to make a decision that is appropriate for you. There is no one answer. In making your decision, a bit of crystal ball gazing and some sticks in the ground assumptions are required. Of course, having someone like GRA behind you who can guide you in the decision process makes a huge difference. We're good at identifying the trees from the wood so to speak. So if you need some help, pick up your communication device – we're literally a mouse click (info@gra.co.nz) and a phone connection (09 522 7955) away. Happy to help.

Request a Meeting

The Professional Trustee Team

09 522-7955

info@gra.co.nz

© Gilligan Rowe & Associates LP

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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

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