1. Check the expiration date of the existing fixed rate
As a first step, it is useful for borrowers to know what their current fixed interest rate is and when it expires.
This information can usually be found by logging into online banking, and/or calling their lender or mortgage advisor.
Borrowers are usually notified six to eight weeks before their loan expires, either by their bank/lender or their mortgage advisor.
“Borrowers can lock in a rate before their current rate expires within the lender’s time frame,” Thompson said.
In a rising interest rate environment, locking in a rate earlier can save money.
If a new rate is not locked in before the fixed rate expires, in most cases the mortgage will switch to a floating (“variable”) rate.
2. Consider plans and goals
To help borrowers decide which fixed-rate option is best, Thompson suggests they have a discussion about their plans and goals.
“It’s important not to rush… think about changes in your family, are you planning a baby, are you looking to sell, buy an investment property – or rent it out and move abroad?” said Thompson.
For example, if it is expected to sell, a variable rate or a short-term fixed rate may be the best option. Those planning to stay in their home indefinitely may want the certainty of a longer-term fixed rate.
“If your current mortgage doesn’t suit your plans and lifestyle, it’s important to review and restructure it to make it smarter.”
3. Evaluate the different pricing options
A fixed mortgage rate stays the same for a fixed term (for example, six months to seven years).
Floating mortgage rates are flexible. Borrowers can repay as much as they want, without paying a “break fee”.
“Having those fixed terms gives you cost certainty, whereas a floating loan can go up and down,” says Thompson.
In a February survey of mortgage advisers, two- and three-year fixed rates were cited by mortgage advisers as a “strong preference” for borrowers.
On Wednesday, two-year fixed mortgage rates at the five major banks start at 4.35%, three-year fixed rates from 4.64%.
Tony Alexander said people have been turning to repair for two years recently. This is probably because a two-year fix is currently cheaper than a three-year fix or longer.
“With the cost of living generally rising for people, they are looking for cost savings – or at least to minimize their cost increases,” says Alexander.
As the cash rate rises, one- and two-year fixed rates could rise more than longer-term rates, making it important for borrowers to check rates before re-pricing.
4. Check rates from other lenders
Rather than lock in a new rate immediately, Thompson suggests checking rates offered by other lenders, for the fixed term required.
There may be an opportunity to negotiate the rate, reducing refunds.
“Borrowers working directly with their bank could do their own market research, look at interest.co.nz and [see] what other banks offer,” says Thompson.
Before approaching a low-rate lender, she suggests checking to see if there are any incentives for new borrowers and if they provide advice.
5. Revise the mortgage structure if necessary
Borrowers who have a fixed rate have the option of structuring their mortgage according to their needs.
Rather than set at the lowest rate, Thompson urges borrowers who want some certainty about their repayments to “spread their risk.”
She suggests that borrowers split the mortgage into at least two and set two different terms. This avoids being hit by a one-shot increase when a fixed rate expires.
“Spreading your risk means dividing your loan into chunks and fixing it over different terms, so you can ride the waves of ups and downs,” says Thompson.
Borrowers could also structure their loan to allow for voluntary payments, thereby reducing the interest paid on the loan.
Since everyone’s situation is different, borrowers are advised to seek advice, contact their bank, or a mortgage advisor.