Is Your Fixed Mortgage Rate a Relic of the Past? Navigating Today’s Falling Interest Rates
For many homeowners, the sting of “rate regret” is real. If you locked in a fixed mortgage rate just a few months ago, watching interest rates tumble can feel like watching money slip through your fingers. But don’t panic – while rates are predicted to remain low through next year, understanding your options now is crucial. From a peak of 5.59% for one-year rates in January, banks are now offering rates below 4.5%, creating a challenging landscape for those fixed in at higher percentages.
The Two Paths: Wait It Out or Break Your Term?
When faced with falling rates and a fixed-term mortgage, you essentially have two choices: patience or action. Waiting allows you to ride out the term and refinance when it expires. Breaking your fixed term, however, comes with a cost – a break fee. This fee isn’t a penalty, but rather a reflection of the financial agreement you made with the lender. It compensates the bank for the difference between the rate you’re paying and what they could currently charge another borrower.
Understanding the Break Fee
Squirrel chief executive David Cunningham explains that break fees are designed to maintain equilibrium. “You contractually made the decision to take a fixed rate loan… the bank has hedged that on the other side.” The fee essentially recovers the bank’s losses from your decision to exit the agreement early. While breaking your term can sometimes be beneficial, it’s often not. Generally, if you stand to save $10,000 in interest over the next year, the break fee will likely be around that same amount. However, a mortgage advisor can assess your specific situation to determine if restructuring is worthwhile.
The Refixing Window: A Prime Opportunity
The most advantageous time to explore your options isn’t necessarily when rates hit a new low, but rather when your term is nearing its end – during the refixing process. This is where competition between banks is fierce, with many offering cashback incentives to attract new customers. Leveraging these incentives can significantly offset any potential costs associated with switching lenders.
What’s on the Horizon for Interest Rates?
Experts don’t foresee significant rate increases in the near future. Infometrics chief forecaster Gareth Kiernan notes a downward trend in wholesale swap rates, reaching levels not seen since early 2022. While direct comparisons are complex due to differing economic conditions, Kiernan suggests a bottom around 4.2% in the coming months. However, he emphasizes that rates aren’t expected to climb substantially until mid-to-late next year, providing a window of opportunity for most homeowners to refix at more favorable terms.
The Floating Rate Reality Check
While the allure of lower fixed rates is strong, it’s important to remember the recent past. Those who opted for floating rates over the past year faced significantly higher interest payments. According to Reserve Bank data, the average floating rate in April was 6.47%. For every $100,000 in debt, someone on a floating rate paid $6,920 in interest over the last year, compared to $5,960 for a one-year fixed rate. The biggest regret, therefore, isn’t necessarily fixing at a slightly higher rate, but remaining on a floating rate while waiting for rates to fall.
The Optimal Strategy: A Look Back at 2023
Hindsight is 20/20, and analyzing past rate fluctuations reveals a potentially optimal strategy. In July 2023, while one-year rates peaked at 7.05%, five-year rates were available at 6.29%. Locking in a five-year rate would have provided immediate cashflow relief. However, a more nuanced approach – fixing for two years at 6.73%, refixing for one year in July 2025 at 4.87%, and then refixing for two years in July 2026 at 4.53% – would have yielded an average rate of just 5.48% over five years. This strategy could have saved $810 per year for every $100,000 of debt, or a substantial $40,500 on a $1 million mortgage.
Navigating the mortgage landscape requires careful consideration and a proactive approach. While rate regret is common, understanding your options and seeking professional advice can help you minimize costs and secure the best possible terms. Don’t simply react to headlines; instead, focus on a long-term strategy that aligns with your financial goals.
What are your predictions for the future of mortgage rates? Share your thoughts in the comments below!
