Ten Year Fixed Rate - Good or Bad

13 February 2015

Lenders are fiercely competing with each other to make themselves more attractive to clients.  While most are competing on price it is refreshing to see some lenders thinking outside the square in what they are offering.  

TSB’s offer of a 10 year fixed rate is definitely outside the square.  While it is common in countries like the US to have very long term fixed rates – some as long term as 30 years! – it is not a common practice in NZ.  Most of us may have some insight as to what we’ll be doing in 5 years but  10 years may be a bit too far away for us to know if locking in a rate for this loan is the best course of action.  

So is a 10 year fixed term a good thing or a bad thing?  Well it’s both. The good thing about the TSB’s current offer is that it is price competitive.  Normally these longer term fixed rates are not.  They can often be quite expensive and fixing for shorter periods of time may be more cost effective

A 10 year fixed term could provide more certainty against rising interest rates.  It’s no secret the expectation of interest rates rising isn’t the same as it was last year but while we think rates will hold or even lower short term expectations can change and often we can be caught out.  By the time we know that rates are going to rise it could be too late to lock in at a lower long term rate.  Fixing the loan for this length of time can provide a longer term security.

The downside to fixing longer term is circumstances can change in our lives that we weren’t expecting.  If you have locked in to a rate for a long term and need to break your loan before the fixed term is due to expire you could be up for some heavy penalties.  Generally the penalties would only be severe if rates had dropped.  While we anticipate this may happen in the short term we do believe that rates will “normalise” back up to the 8% where it has been the average since the introduction of the OCR in the 1980s.  So if the risk of penalties is low then this makes the longer term fixed loan quite competitive.  Especially on the low rate that TSB are offering now.

While this offer does seem attractive to some it will not suit everyone.  Our recommendation is to be aware of what is on offer out there but make sure you get the loan that suits your situation.  We need to take advantage of offers that benefit us but we shouldn’t be swayed by seductive advertising campaigns that try and do a “one size fits all” offer.  To get a balanced perspective we recommend  consulting a mortgage specialist such as a mortgage broker.  They are able to identify the needs of their clients, take advantage of the current financial market conditions and match the best option that best suits their clients’ needs.  Given that they do not charge for their service this can be a great return on the investment of simply picking up the phone to contact them.  

 

Published In Whakatane Beacon

This post was written by

Trish Marsden - who has written 96 posts

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