Stability of fixed mortgage a source of comfort

Do your homework when choosing whether to fix or float your mortgage rate - and for how long.

Do your homework when choosing whether to fix or float your mortgage rate -- and for how long.

Should I fix or should I float? It's the million dollar question for homeowners.

It's a hard call to go on to a floating rate if fixed rates are lower -- which they are now in New Zealand. Reserve Bank governor Graeme Wheeler says he might lower the official cash rate (OCR), which determines mortgage rates, if demand drops.

If you want personal financial stability, however, fix for the medium term, says mortgage broker Geoff Bawden, head of Q Advisor Group.

"If I was budget-conscious and looking for stability I would still be going for three years plus. They are good rates. Will you get cheaper? Maybe, but longer rates give the stability I need."

Going for short-term six month to one year rates is a gamble, says Bawden. "At some point you have to ask yourself how low will rates go? Can they go that much lower?"

Bawden believes mortgage interest rates may still drop 0.25 per cent lower, but is that worth the uncertainty? What if they went higher?

"If you fix longer you are accepting there is a potential rates might drop a little bit more. But your trade-off is [that] you pick up the longer term stability of the rate you have got. I always say what goes down, ultimately goes up."

At the other end of the scale, fixing long -- up to five years -- could mean you end up paying way more than you would have otherwise.

This has occurred when homeowners fixed for long periods at 8 per cent or more thinking rates would rise. The reality was they fell below 6 per cent in no time at all leaving a lot of homeowners very angry indeed with themselves.

For homeowners, Kris Pedersen, of Kris Pedersen Mortgages, recommends fixing because fixed rates are lower than floating. Some will leave a portion on floating to "hammer the debt" by making extra payments.

Stuart Wills, of Mortgage Link Auckland, is a great believer in fixing mortgages in a number of chunks so you can be never be hit with a drastic rate increase in one fell swoop.

"I still believe that rates will come down. But by fixing most of it you get security."

If a third or a quarter of your loan is floating you still get some advantage of rate drops.

"On a $300,000 mortgage you might put $50,000 on floating and split the difference between one and two years," says Wills. "Not longer, because the rates look like they are going to go down.

"If it was an investment mortgage or an older [homeowner] I might go longer. But, for a younger person, their circumstances change. They might start a family, sell the house or one person might get made redundant."

Economists such as ASB's Nick Tuffley are predicting the chance of a rate drop later this year. Tuffley says the odds are 50/50.

Likewise Westpac's chief economist, Dominick Stephens, is giving a 40 per cent chance of an OCR cut later this year. The Official Cash Rate has remained unchanged since July last year.