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Should you fix, or stay floating?

Posted in Calculators

This 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.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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5 Comments

Interesting tool Bernard,

Interesting tool Bernard, helps for sure with the numbers juggle. I'm floating a $500,000 + mortgage and have held off for almost three years despite all the reoccuring hype to fix -saved thosands as a result!! I feel the time is getting closer to take that jump though and I'm looking at all the options.  What i would really love to see Bernard is a 3 Year Fixed Rate option incorporated in your calculator as this rate is becoming even more of a certainty for a lot of people looking to fix or fix/float. Want to give it a try - would be really interesting!!  Cheers

Seriously Bernard, One- and

Seriously Bernard, One- and Two-Year rates aren't nearly as relevant to floaters as they were before, that changed drastically over the last 12 to 18 months. As a result your calculator is completely dated if you don't include the 3-Year Option - and while you are at it work out a 5- Year scenario. The calculator is of course only a guide, but it might as well provide the most options you can give it, so that it gets people thinking about a way forward amidst all the rhetoric we encounter wading through the countless suggestions from economic visionaries and monetary clairvoyants. It's a different ball game Bernard and I think I (like many others) am ready to juggle with more than two balls!
Cheers Again.

EN: Unfortunately, our tool

EN: Unfortunately, our tool can't really be made to work with more than a two year forward horizon. We don't input any 'judgment' into it; it runs using market rates for 'futures' for the NZ 90 day bank bill rates as quoted on the ASX and those rates are quoted ahead only about two years. Further out is just not available. Sorry.
We are not 'guessing' anything here, just reflecting what market signals are showing today. If you (or any other reader) knows how to access market rates further out than two years, we would be happy to know them. email us at info @ interest . co . nz

This calulator is

This calulator is great!
 
Can you please update it for new predicted OCR tracks?
 
thank you

Would be great to integrate a

Would be great to integrate a few other factors into this calculator that would make a meterial difference to descision - for example a discount rate , so you can rank the investment (extra initial cost of borrowing) against other investment options for that same cash flow,
Obviously a dollar now is worth more than a dollar in a year's time.
Also an internal rate of return investment performance indicator to rank the different options over that timeframe, incorporating the time value of money.
Also, it would be good to compare mortgage outcomes resulting from a fixed payment each week under each scenario.