This new calculator can help you assess whether you should stay on a floating mortgage rate or change to a fixed rate.
It takes into account where the markets expect the Official Cash Rate and floating rates to go over the next couple of years and allows you to work out whether staying floating is cheaper than fixing at a certain rate for a certain time. It works out the cost of floating using the assumed size and timing of rises in the OCR that the financial markets assume. It is updated daily.
However, it is only designed to 'help' you make a decision. It does not take all factors into account. Some of those other factors will be non-monetary, some specific to your personal situation. For a full and proper assessment related to your specific circumstances, you should seek professional advice from a qualified person.
Don't make a decision based solely on this tool. It is designed to help, not to decide. It only factors in the technical rate outlook data, nothing more.
How it works ...
At any point in time, certain things are known. These include current wholesale rates, current mortgage offer rates, and what the futures market is pricing.
Markets aren't really 'predicting' what a rate will be at a point in the future; what they are saying is, "given the circumstances today, the balance of opinion in the market is that a rate of x% in y months can be expected". Tomorrow, this same approach could well give a different outcome, equally valid based on tomorrow's circumstances. Futures market participants will continuously adjust their positions as these changes happen. So, they are not predicting a committed rate.
It is these 'futures' positions that are used in this calculator. These positions are updated daily, so this calculator may well give different answers tomorrow.
Therefore the tool looks to make a calculation based on the best data we have today.
It calculates the monthly payment cost for two scenarios over a 24 month future period, and compares the total payment cost of each, one floating, one fixed.
If you use a one year rate, the tool assumes at the end of the period you will enter into another one year fixed rate mortgage at a new implied rate based on the difference between today's one and two year swap rates.
If you use a two year rate, the tool uses the 2 year fixed mortgage you input.
The assumptions used ...
This calculator is designed to be used by someone who is thinking of changing from a floating rate mortgage to either a one or two year fixed rate mortgage. (Don't use it for any other purpose.)
Payment calculations are based on a standard 20 year table mortgage taken out 'now'. If you have actually taken out a mortgage earlier (or over a different term than 20 years), the absolute values in your case may be less, although relativities should be similar.
This tool assumes the margin is constant between the floating rate and the 90 day bank bill rate - in other words, we are changing the future variable rates by the same amount as the 90 day bill rate changes. It is assumed that the 90 day bill rate is a relatively accurate predictor of the OCR and therefore the floating mortgage rates. This is usually the case and has been over a long period, but it is no certainty.
If you use a one-year rate, the tool assumes at the end of the period you will enter into another one year fixed rate mortgage at a new implied rate based on the difference between today's one and two year swap rates.
Other resources ...
You can compare two mortgage calculation scenarios very easily, and with substantial flexibility, by using our powerful mortgage calculator. This allows you to set any key factor and see what the other factors must be.
All the current mortgage rates are listed here.
32 Comments
For example this calculator shows that my brother in law would be NZ$1,633 better off over two years by fixing for 2 years at 6.4% than staying floating at 5.75%. That includes the assumption that the OCR rises to 4.25% by mid 2012.
Here's my Brother in Law's guide.
http://www.interest.co.nz/personal-finance/54584/opinion-what-bernard-h…
We need a calculator that allows you to put in your own guesstimates of what will happen (and cruciallly, when) with floating mortgage rates , and then compare your interest costs with a range of the available fixed rates and terms if your were go down the fixed-rate path now. We need to know if we'd be better of staying on floating or switching to fixed, based on how we see the floating rate increases being applied through time.
E.g. for the next two years (i.e.24 months) imagine you see the following scenario as being quite likely:
Floating rates (starting at say 5.59%)
rise 0.25% in September, ditto for October, December and Feb 2012.
And again in May, but by 0.5%. And then no changes.
Are the interest costs over 2 years (from now) going to be more or less than if you'd switched to a fixed rate mortgage of say 6.45% right now.?
I've done a spreadsheet for myself that calculates the answer, that's not much use to anyone else though, so we need this type of calculator available on the web so that people can play around with the figures for themselves. I've asked the Retirement Commissioner to put such a calculator up on the Sorted website, maybe Interest.co.nz could do the same? A further level of refinement to the calculator that Bernard used for his brother in law is all that is needed to have a bit more confidence in the answer returned.
I think if one is going to fix for only 2 yrs they are crazy.
By the time 2 yrs comes around there is a good chance interst rates have climbed above the long term ave of 8.3% and will have to hook into a rate higher than that.
But if one manages to hook in to a longer term say 4 or 5 yrs, below the long term ave, they may very well see their way thru the 5 to 7 yrs cycle of high rates..
1 and 2 yr rates are no more than competeive marketing stragities of the banks to hook new customers in with...We have seen this several times over the last 12 months, a bank dropped the fixed as a "special deal this month"...The banks will be rubbing their hands with glee if people hook in short term now.....and will most proberly knock up long term earlier if a lot of people hook in long term now.
If swapping terms at the beginig of a historical cycle on the up...fix for most of the cycle early. If fixing well into a cycle fix for shorter term so can pick up the lower rates......Remeber the issue re charges banks where making as interest rates fell? And those on longer terms high rates have just come off them in the last 12 to 18 months?
Do we have a graph of interest rates from 1970?
but on 4 or 5 years you will pay a large premium and especially if the OCR stays where it is or doesnt rise much (which is what I think) ...now if its peace of mind, OK........
I think going fixed for 6months if its lower than the floating right now, or even 1 year makes some sense...if the US defaults and its suddenly very nasty that should clear the incident...
1970, we past Peak oil, that is a paradym shift, history is history IMHO in this situation....we have never been here.....and I think shortly we will wish we were not.
regards
Yes it would IMHO, I will have a go at my old spreadsheet tonight if i get time bust making a new kitchen. I know last time in 3 years Ive saved well over $4k by staying floating, all the time the banks were saying fix! fix!! So they were wrong then and I see nothing to make me think they will be right this time, in fact its looking worse, I think a 2% OCR is more likely than 6% personally.
Great thing is, I simply kept my payments up so Im shaving time off / saving interest....I might try see what that 4k does in terms of interest on the capital saved over the remainder of my term.....it will be approx but the principal amount is about $2.5k I think but over 15 years that adds up.
regards
Just coming to the end of first 18 months of a home loan term (6.39 was the starting rate, 2-year rate now is about 6.4). Started with 60% fixed, 40% revolving credit. We've made big inroads in the floating, while the fixed has gone down depressingly slowly ($7,000 off the principal in 18 months, with the repayment term set at 20 years).
As someone else noted, a mix of floating and fixed has served us well. A bit of security, plus the chance to whack big chunks off the floating. Although it's interesting to face the fact that we are borrowing back money we've paid off on the floating mortage if we want to buy a wood burner, replace a car etc. I'm told it's still the best use of every dollar we have spare to pay down the floating.
Nobody has mentioned that if there is a decent disparity in the rates, in favour of floating, you can pay off up to 5% of the remaining balance on the fixed by transferring money from the floating (once in a calendar year with Kiwibank).
A few suggestions:
- Add the remaining term of the mortgage - this will allow you to calculate minimum repayments
- Add a box to put in your monthly payment - not all of us pay the mimimum
- If you don't to give full control to the timing of the rises, at least give 3 scenarios: estimted, optimistic (slower than estimated rises) and pesimistic (faster than estimated rises).
- Fixing fees - I'm with kiwibank, and they charge $400 every time you want to fix, which has a tendency to pretty much wipe out any benefit from fixing...
I've got a spreadsheet for working this all out, but on my spreadsheet I just pick random increases out of the air, which isn't very scientific, but all the other math is good :)
Cheers
DJM23.
There are still deals out there but not for long - i got 6.2% for two years and .25% discount on floating for the same length of time at ASB a month ago - as with others had to get quotes from other providers before they would do it but well worth it !
I dont think there is any downside at the moment so the risks are all up up up - thought it best to at least fix a big chunk of it and focus hard on cutting the floating bit - that way in two years even a 2% jump would still be manageable!
Nice job guys. This calculator seems to show that (quoted) 2 year fixed rates don't make a hell of a lot of sense.
2yr and 1yr (+ 1yr implied) are about the same (in terms of savings vs floating) but of course only fixing for 1 year gives you the opportunity to make another decision 12 months sooner, and that has value.
Because it's around that time that you want to be making another decision. By then we will have a better idea if rates will be staying low for a VERY long time, in which case you would go back to floating, or it could be inflation full steam ahead, in which case you probably want to fix longer term (4 or 5 years).
Disc: No mortgage and no plans to get one, so no skin in the game.
Interesting, if the low forecasts for the OCR prove to be right (a big call), I'm a whole $1,200 better off floating rather than fixing for 2 years (why would anyone fix that short anyway by the way). So for a potential savings of just $1,200 by floating, I'm risking an unknown/unlimited upside risk that I may not be able to afford
Excellent calculators Bernard, convincing proves that you should fix unless you have absolutely no understanding of the risks involved in the interest rate markets over the next 2-3 years.
If you stay floating, in the long run this will normally be your cheapest option and you only ever pay market rates. Why you want to pay interest on a mortgage when you have options like Liberty Trust I can't quite work out. Check them out here and sign your children up as soon as you can. www.libertytrust.org.nz
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.