Refixing: What to do?

The most common question I'm getting at the moment: How should I refix?

It's easy to feel panic-pressured into locking in historically high longer-term interest rates with the market the way it is as mortgages come up for refix. But is that really the best thing for you? Maybe... but maybe not.

The most important thing to consider when refixing isn't actually the interest rates (although they are still a very important aspect!). You need to choose a term that best suits your future plans and fits well with your attitude towards and ability to absorb risk.

A good example might be that you're thinking of perhaps selling and up-sizing in a few years. No firm plans for now, but it's potentially on the cards. What would fixing for three, four or five years potentially mean for you if you were to sell?

Well, you'd need to break your fixed rate. Most economists predict rates will be lower than where they are now in a few years' time. Fixed rate break fees are complex calculations, but a large part of the calculation is current market rates vs rate when you fixed vs time remaining on your loan term. Generally speaking, the lower rates get in comparison with the fixed rate you're breaking, the higher your break fee will be.

People can be quick to forget just how significant these charges can be - after all, in an environment where rates are rising, the fees have been non-existent for most. But if you go back a few years, I've seen plenty of examples of clients facing $10,000-plus break fees - one client of mine once had a break fee north of $20,000!

So - rates need to be chosen based on your needs and intentions first and foremost. It makes no sense fixing long-term if you're planning on making short-term changes, or face uncertainty into the future.

Interest rate 'peaks' are also a timely reminder of why having your lending separated and fixed for different periods with varying refix dates is so important.

Not many of our clients will have one large lump-sum loan that's fixed for, say, a year. Most will have their lending split into two or three loans, all fixed for varying periods of time, with care being taken to ensure that all of the lending doesn't come up for refix at the same time. Whether it's one year or five years, having all of your lending coming up for refix at the same time can be a major risk, and as many are finding at the moment can potentially result in repayment increases of up to 100% more - ouch! Having variance in your structure acts as a security blanket - it buffers and slows the effects of any interest rate variance, be it good or bad. Higher rates won't hit you hard overnight, and you'll be checking in on your lending more regularly and can take advantage of rates as they trend downwards.

If you have questions about refixing your mortgage, or restructuring it in a way that works best for you, feel free to get in touch.

Note this article is not intended as personalised advice, and should not be acted upon without seeking independent personalised financial advice.