Retail interest rate focus

Author Gerald Mullaney

20 February 2025

It always pays to review one's focus from time to time as things over time can get a little blurry.

One simple focus is the term rate one locks in, floating rate, 6mths, 1yr, 2yrs, 3yr, 4yr or a 5 year rate.

The answer to the question, of what rate is best to take follows.

1. Never float unless your two to three week away from locking in a great lower rate or the OCR is reducing causing retail rates to drop.

2. Six month rate is only used as a hedge against interest rates when waiting for the next low rate within six months.

3. One year rate is another hedge position to take and gives certainty for one year waiting for rates to go lower.

4. The two year rate has in the past been the most popular choice but debitors are getting smarter and are hedging shorter in case rates go lower say in one year or 18 Months.

5. The three year rate is starting to get into longer term but if the rate is low, then it can be considered, as it gives stability and security for three years.

6. The four year rate gives additional security over three years and more stability knowing what ones interest cost will be secured over a four year period.

7. The five year rate is a long term rate and one of the only reason why one would take a five year rate is if one requires security of interest cost, stability and security over the longer term of five years.

8. The other reasons one would lock four to five years if INFLATION was to take off, then rising INFLATION would be a sign to lock longer term of three to 5 years normally any INFLATION may abate within four year less or more as INFLATION is a sign the retail interest rates will be on the rise. The four year rate is high security and the maximun security is five years or longer depending on INFLATION.

   
   

The other point to consider up to 2021 fixing short term 6 month to one year was more cost effective than fixing long term over time. After 2021 fixing long term was the answer as INFLATION was on the rise which did occur between 2021 to 2024 this caused interest rates to nearly treble, therefore those who locked in a four to five rate never suffered the pain of very high interest rates. 2.99% was better than 7.85% therefore there was a substantial saving for those who secured their future cash out flow thus expenses.

The other point is, that fixing short term can give flexibility, especially if your say, selling in six month time or earlier or if rates are continuing to decline therefore locking in a six month by six month rate until retail interest rates hit a low then one can decide to lock short or longer depending on INFLATION.

Very low retail interest rates are a sign that INFLATION is on the way and the very low retail interest rates may not last very long, therefore it can be a great idea to lock at a low as the RBNZ will move at pace to increase the OCR to contain inflation.