Should You Fix Your Home Loan for Longer? Mortgage Rate Guide

Current Mortgage Interest Rate Landscape

Interest rates have risen from the lows recorded at the end of last year and early this year, according to financial data. Six-month rates at major banks sit at approximately 4.75 percent, while one-year rates hover just under 5 percent. Meanwhile, two-, three-, four-, and five-year fixed rates range between 5.39 percent and 5.69 percent. ASB senior economist Chris Tennent-Brown noted that one-year rates remain about 2.5 percent below their previous peak. Borrowers face a fundamental trade-off when selecting a term, he said. It’s not all about picking the bottom of the mortgage interest rate cycle, especially now with the balance of risks and market pricing pointing to higher mortgage rates, Tennent-Brown stated, as reported by RNZ.

Evaluating Short-Term Versus Long-Term Fixed Rates

While many borrowers prefer fixing for a year or two to maintain financial flexibility, economists suggest there is limited downside to locking in longer under current market conditions. Tennent-Brown indicated that if conservative Official Cash Rate (OCR) forecasts prove accurate, future one-year rates could eventually align with current four- and five-year rates. If our reasonably conservative call on the OCR proves correct – they get it up a half a percent more but don’t need to go beyond that – I’d expect that to translate to one-year rates being lower than what the four- and five-year rate are now, Tennent-Brown said, according to RNZ. He added that given expectations for one-year rates to rise by roughly half a percent over the next three to six months, longer terms offer substantial certainty at a historically low price. Shorter-term rates have historically rewarded borrowers in falling markets, but they have penalized consumers when rates climbed faster than anticipated. Shorter durations also allow frequent opportunities to reassess personal finances and execute lump-sum payments. For borrowers seeking a compromise, splitting loans across shorter and longer terms provides a blend of stability and flexibility.

Bank Economist Outlooks on the OCR

Westpac chief economist Kelly Eckhold pointed out that the one-year rate remains the cheapest segment of the market due to expectations of future rate hikes. The whole curve is fairly flat compared to what it has been. Even if you go out to three years you only have to pay an extra 0.4 percent or 0.5 percent more basically for that, Eckhold said, as cited by RNZ. He described longer terms as reasonable insurance against significantly higher borrowing costs. BNZ chief economist Mike Jones noted that the market has already priced in an OCR peak of approximately 3.5 percent. That expectation naturally caps further increases in fixed mortgage rates even if the central bank delivers additional OCR hikes. Retail interest rates have actually been rising for about nine months in anticipation of this tightening cycle, Jones said, according to RNZ, suggesting that the most substantial rate increases may already be in the past.