If you fixed your home loan more than a few months ago, you might have mixed feelings as you watch interest rates continue to fall.
While interest rates are likely to stay low through next year, you might worry you are missing out on some potential savings right now.
From an average 5.59% for special one-year rates in January, banks are now offering rates below 4.5%.
So what can you do if you now have rate regret?
You really only have two options: Wait it out or break your fixed term.
If you break a fixed term, this will come at a cost.
The bank is likely to charge you a break fee. This reflects the interest rate you have agreed to pay for the term of your borrowing, compared to what the bank could charge another borrower for the same amount now.
Squirrel chief executive David Cunningham said it could sometimes work, but often was not worth it. "A break fee is keeping it equal. You contractually made the decision to take a fixed rate loan… the bank has hedged that on the other side."
He said the break fee would be the "recovery" for the bank. "Generally, there's limited benefit from breaking and paying a break fee and then moving to a lower rate. But a mortgage adviser can give advice because sometimes it can be beneficial.
"Generally, it feels like if you could save $10,000 in the next year, your break fee will be $10,000. But it's often worth checking because overall restructuring could be beneficial... but the best time is when you're refixing — when it comes up for rollover — looking into moving and getting the cashback gift, which is where a lot of the competition in banking is today."
The other option is to wait for your term to finish and hope to refix at a lower level after that.
"We are seeing some renewed downward pressure on wholesale swap rates, which have dropped to their lowest levels since February or March 2022," said Infometrics chief forecaster Gareth Kiernan.
"Obviously, there were a few other factors in play at that stage affecting the relationship between wholesale and retail rates and interest rates were trending upwards rather than downwards, so there's a degree of comparing apples with oranges, but one-year rates in March 2022 were 3.9%. I'd suggest that 4.2% might be the bottom for rates in coming months."
But he said that rates were not forecast to pick up to any significant degree until mid or late next year, so there will be time for most people to refix.
Reserve Bank data shows that most lending is on fixed terms that expire within the next year. About 20% of owner-occupied lending has one to two years left to run.
The other thing to keep in mind is that while you might be able to get a lower fixed rate now than you could when you refixed, you had to do something in the meantime. Floating and six-month fixes have been more expensive than the longer terms for some time now. In April, the average floating rate was 6.47%.
Kiernan calculated that, for every $100,000 in debt, someone would have paid $6920 in interest if they were floating over the past year, $6040 if they took a six-month fixed rate and $5960 if they fixed for a year.
"So there's not a massive difference or amount of regret between the shorter-term fixed rates —the most regret is if you sat on the floating rate for any length of time waiting for interest rates to come down.
"Probably the biggest potential for regret, as always, is if you simply took the lowest rate on offer near the peak of the cycle. For example, in July 2023, one-year rates were 7.05%, and five-year rates were the lowest available at 6.29%.
"Locking in the five-year rate would have reduced immediate cashflow pressures for mortgage holders because their repayments would have not been as high compared with other fixed rates, but we estimate that the optimal strategy would have been to fix for two years at 6.73%, refix for a year in July 2025 at 4.87%, and then refix for two years in July 2026 — around the trough of the market — for 4.53%.
"The average rate you'd face over five years would then be 5.48%, saving you $810 a year per $100,0000 of debt — or on a $1m mortgage, $40,500 over five years."
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