On the back of the February 19th 50 basis point cut to the Official Cash Rate, there was the very welcome sight of some interest rates, starting with a 4 again. It's been a rapid change to where we were in the middle of 2024 when interest rates were sitting in the high 6% / early 7% range and Reserve Bank Governor Adrian Orr alluded that there was a chance of further increases.
The Reserve Bank has now signalled that the pace of cuts is likely to slow, with us more likely to see future cuts being 25 basis points rather than the 50 we have had over the last 3 reviews.
Over the last year or so we have been mainly in favour of the 6 month rate as it made sense to ride the rates down. There is starting to be a significant difference in the rates offered between the 6 and 12-month terms and also out to the 24-month period, where several banks are pricing competitively at 4.99%.
I have been deciding which option to take by doing a basic break-even calculation. As an example, how I look at this is as follows:
| Loan Amount | Rates offered |
| $1,000,000 | 6-month rate: 5.69% |
| 12-month rate: 5.15% |
| 24-month rate: 4.99% |
Then, the process calculates the interest costs of $51,500 for the 12-month term and $28,450 for the 6-month term. By taking the 6-month cost away from the 12-month cost, we come to $23,050, and by doubling this figure, we can see that to end up being in a better position by rolling two 6-month terms, the 6-month interest rate would need to be 4.61% or lower in 6 months to have made it worthwhile rolling two 6-month terms over the 12-month option. While I expect we will see at least another 50 basis point drop to the OCR, I don't see the 6-month rate being anywhere near 4.6%.
If the same calculation is conducted where the 1 and 2-year options are compared, the 12-month rate would need to be around 4.83% or better in 12 months. This could be a possibility. Also, I believe there is a strong chance that the low point in interest rates may be in the next 12 to 18 months, so fixing for 12 gives the opportunity to look at then fixing for the longer term, whereas if you fix for 24 months now, there is a real chance of missing the low point of this cycle.
If you want to discuss interest rates or would like to get preapproved please feel free to contact me HERE and I will be in touch to discuss further.
