Mortgage Roulette? Or a longer term play?
The Reserve Bank of New Zealand’s recent decision to cut the Official Cash Rate (OCR) by 0.50% has changed the game for borrowers. With more cuts predicted, many are left wondering: should you fix your mortgage for six months or 12 months, and what could that decision mean for your finances in 2025 and beyond?
When the OCR drops, mortgage rates generally follow, making borrowing more affordable. This is encouraging for homeowners and prospective buyers alike.
But it also presents a choice: do you place your bets on short-term savings or opt for the safety of a longer-term rate?
The Case for Fixing for 6 Months
Choosing a six-month fixed rate can feel like a strategic bet on the future. It’s a bit like placing your chips on red, hoping for a win.
With the recent October OCR cut, and another likely in November, the odds suggest that rates could continue to drop. Economists predict further reductions, including at least a 0.25% cut in February, potentially leading to rates in the mid-4% range by mid-2025.
For borrowers with strong cash flow, low debt, or business interests that thrive on flexibility, a short-term rate offers the chance to secure a better deal when their term ends.
However, this strategy does come at a higher upfront cost—currently around 0.75% more than longer-term options. For those already feeling stretched, the prospect of future savings may not justify the immediate expense.
The Case for Fixing for 12 Months
On the other hand, fixing for 12 months provides stability and peace of mind. If opting for six months feels like a gamble, choosing a year-long term is more like playing it safe, keeping your chips secure.
While rates might dip further, locking in a rate for 12 months eliminates the uncertainty of renegotiating in just half a year.
Many borrowers rolling off rates in the 3-4% range are already facing a significant jump to 6% or more, and this leap is a stretch for their budgets. For them, securing a lower-cost repayment for a longer period is preferable to taking a chance on rates dropping further.
They’re willing to trade the possibility of cheaper rates in late 2025 for the certainty of consistent payments throughout the year.
What’s the Right Move for You?
There’s no one-size-fits-all answer. Are you prepared to take a bit of a gamble, waiting to see if rates dip while managing a slightly higher cost now? Or do you prefer to lock in a lower rate, even if it means potentially missing out on further savings down the line?
Your choice should reflect your financial situation, lifestyle plans, and risk tolerance. Are you expecting a change in income, planning significant purchases, or looking to minimize costs in the near future? Or is peace of mind and consistent budgeting more valuable to you?
When it comes to mortgages, having a clear strategy is essential. The recent OCR cut has opened up new opportunities, but it has also underscored the need for thoughtful decision-making.
And while I’m not an expert at the casino, I know it’s better to have a solid plan than to go all in and hope for the best. A steady hand, sound advice, and a bit of foresight can help ensure you walk away with a win, no matter how the market shifts.