Ball & chain mortgageImagine setting your interest rate at 5.89% and never batting an eyelid over it for the next 10 years. That’s what TSB’s recent announcement essentially offers – a 5.89% home loan fixed for 10 years. But does this deal really suit the average Joe?

The Herald asked us for our opinion on this just recently and we added our two-cents, but there’s a lot more to say on making a decade long commitment to a pretty little number.

In the last decade many people will have married, mortgaged, multiplied their family, had a mid-life crisis, career move (or three), city move, come into money… or even divorced, to end on a real downer! That is life. And life doesn’t stay fixed as an interest rate can.

In my humble opinion, this is a deal that works best for property investors, quite rarely for owner-occupiers. Why? Well, most of us don’t plan life that far ahead. Property investors on the other hand generally do. If you’ve set up your investment you’re generally going to hold onto it for a 10 year stretch, if not a lot longer, to maximise potential capital gains. These ‘set and forget’ home loans makes sense for investors as it gives certainty in terms of what’s going out each week, and control over interest increasing the outgoings on the investment.

You may say, ‘well, that’s exactly what I want from my home loan’… and that’s great if you:

– You can stay the course

– You expect interest rates to rise

– You absolutely need the certainty it gives you

BUT for most of us we can’t be certain what the next 10 years holds, let alone the next 10 months. It’s a rather hard proposal to say yes to, when it comes to your own personal property.

Things to consider:
  • Break fees – You sign up to a 10 year fixed rate home loan, circumstances change, you have to sell – you’re then faced with hefty break fees. And the earlier you break, the bigger the fee.

Think of it like this: there is always someone else on the other side of the loan, that someone is an investor (all the Grandmas with their life savings on term deposit) and they expect a steady return for 10 years. If you want to break your loan just remember you’re breaking someone’s term deposit too, which is more or less why break fees apply. Don’t mess with Grandma.

  • Interest rates rising – It would take a miracle of epic proportions not to see interest rates rise in the next 10 years… That being said though, most of NZ has been poised to see rates rise over the last 18 months, yet lo and behold, they’re sitting back down at the bottom of the barrel (no complaints from me!). But it goes to show how badly wrong even the experts can get it. Setting a good rate like this one does give stability, but who’s to say the ebbs and flows of interest over the next decade won’t even out to around the same amount?

 

Setting your next decade in stone, so to speak, may be just the stability you’re looking for – but it does mean giving up flexibility. Don’t forget that ‘shit happens’ in life and you may need to get out of the loan. That could be tricky. Or it could be easy. That’s exactly the kind of uncertainty a fixed rate is designed to avoid but the reality is you’ve just got to look at the deal on its merits and see if it fits you.

If you’re thinking a 10 year mortgage is a real possibility for you, then have a chat with us. We can check you through all the pros and cons without trying to sell you in to a 10 year term too early. It’s well worth a chat.

 

 

About Campbell Hastie

Cam is one half of Auckland based mortgage brokers, The Go 2 Guys.

He makes a living by sharing what he knows about mortgages with people, arranging mortgages for people and then insuring people.

He doesn't claim to know everything about mortgages himself which is why he teamed up with David Mercer — hence the ‘2’ in Go 2 Guys.

He writes posts regularly on his blog and has been told he has an ability to share his knowledge in a simple and sometimes memorable way.

Feel free to comment and ask any questions. Contact Campbell Hastie m: 027 697 7789.

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