5.99% – as good as it looks?

An already slow autumn housing market is heading into winter and NZ owned challenger bank SBS (Southland Building Society) has come out with an enticing headline mortgage rate of 5.99% in an effort to increase its market share. 

On the face of it, 5.99% looks pretty good. It’s the first rate starting with a 5 that we’ve seen since July 2023 and it’s around 0.66% lower than any main bank’s published offer. When faced with rates in the mid 6’s to mid 7’s this is sure to tempt many.

However, it is a 3 year fixed rate.

Typically in NZ, the longer you fix your mortgage for the more expensive the interest rate gets. Rarely, this switches and the longer term fixed rates become cheaper than the short term rates. That’s where we are at the moment. 

The last time the long term fixed rates (3, 4, 5 years) were cheaper than the short term rates (6m, 1 year, 2 years) was in 2007/2008, just before the Global Finance Crisis kicked off. A heap of NZ’ers locked in 3 – 5 year fixed rates in the high 8’s and early 9’s at that point as they were the cheapest rates. Rates then fell fairly quickly by 3% down to 6%. Those locked in on 5 year fixed rates around 9% were ‘very keen’ to get out of those high rates and into a 6 but the ‘fixed rate break fees’ were so high that for most it wasn’t worth breaking. 

That’s the key here – ‘fixed rate break fees’. When you take a fixed rate in NZ, if you want to exit the rate before the fixed term is finished, you’re liable for fixed rate break fees. Most banks publish their fixed rate break fee formulas on their websites. The formulas are rather long and complicated and always have a variable which is the ‘cost of wholesale funds’ on the day you go to break your rate. Which no one can accurately forecast.

So no one can accurately forecast what a fixed rate break fee might be in the future. But a very rough rule of thumb is that if the rates have gone up from when you took the rate, there probably won’t be a break fee. If the rates have gone down from when you took your rate, there likely will be a break fee.

As no one can read the future and tell you where interest rates are going to go, if you’re considering taking a long term fixed rate such as SBS’s 3 year at 5.99% you want to be pretty sure you won’t need to break that rate before it finishes. 

Having said all that, if you follow the financial news and have a view on where you think rates will head, it’s good to look at the numbers on it and compare total costs for various rates. For example, if you’re trying to decide between the 3 year 5.99% rate and a 1 year rate of 6.85%, the break even between those rates is 5.56%. That means that in 1 year’s time, if the 2 year rates are lower than 5.56% you would have been better off taking the 1 year rate then refixing for a further 2 years (to make up the total 3 years). Do you think 2 year fixed rates will be lower than 5.56% in 1 year’s time?

So yes, 5.99% is a headline grabber but there is quite a bit to consider before jumping on it. It could be a great move or it could be a decision that costs you many thousands. Of course everyone’s situation is different so seek professional advice before making a decision.

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