Rising Interest Rates - Should I Fix or Float?

Aug 10

With the reserve bank outlining a phase of predicted OCR increases we are often asked – “should I fix or float?”.

We often see commentators making very broad statements like “now is the time to fix for 2 years” and we disagree with this approach, as it is not that simple and requires an understanding of each client’s needs and priorities.

There is however useful information available to help make this decision. There are many sources of economic data, forecasts and commentary focusing on what will happen to interest rates.

This can pose another problem which is how do you wade through the quantity of information available, which is often conflicting, to form an opinion on what is likely to happen.

Current research reveals that most economists predict the OCR will be raised to between 5 and 6 per cent by early 2012. They expect another 0.25 per cent rate increase in September, while the Bank of New Zealand is forecasting increases at each of the three remaining OCR reviews in 2010, before a pause in January.

Getting the right advice from informed people is very important as the wrong decision can mean you pay more interest that you need to. Of course no one can get it right all of the time, however it is better to be armed with the right knowledge before making the decision.

So before you make the decision we strongly recommend that you talk to your broker.

They keep informed about the market, analyse the different industry commentaries and will understand what you are looking for before making a recommendation to fix, float or a have combination of both.

We have put together an overview of some of the lender’s economists thoughts on what will happen to rates and whether they believe it is the right time to fix or float.

ASB Bank

Chief economist Nick Tuffley said today's RBNZ announcement meant there was "no real hurry" for borrowers to fix mortgage rates.

"There may be some scope in the future for lower long-term rates over time, depending on the lasting impact of the RBNZ’s current and future actions and whether the lift in global long-term rates also abates," Tuffley said.

"But certainly there is no hurry at present to fix."

ANZ

Senior markets economist Khoon Goh echoed those views, saying: "Today's message is clear cut - if you are a borrower, don't panic to rush and fix."

Westpac

Brendan O'Donovan, chief economist at Westpac, says the last OCR hike in June hasn't been fully reflected in short-term mortgage rates and fixed-term rates for two or more years have actually fallen.

BNZ

Chief economist Tony Alexander said floating rates were still more attractive at present, but the gap was likely to narrow.

"For me it would still be a coin toss" between fixed and floating, leaning towards a two or three-year fixed rate. "We still see the interest rates going up although with a lower peak."

MPS/OCR dates

2010

16 September Monetary Policy Statement

28 October OCR announcement

9 December Monetary Policy Statement

2011

27 January OCR Announcement

10 March Monetary Policy Statement

28 April OCR announcement

9 June Monetary Policy Statement

28 July OCR announcement

15 September Monetary Policy Statement