Fix for 6 months or 1 year? How I made my decision

I fixed one of my home loans this week and had to decide between two options:

A)     Fix today for 6-months (and then fix again for 6-months in 6 months’ time)

or;

B)     Fix today for 1 year (nice and simple!)

The rates my bank showed me were: 6-month 6.85% and 1-year 6.35%

Which of those two options will work out cheaper over the next 12 months - A or B?

For option A to cost me the same as option B, the 6-month rate in 6 months’ time would need to be 5.85%.

That is because the average of the two 6-month rates (6.85% and 5.85%) equals the 1-year rate (6.35%).

Next question I ask myself is - do I think the 6-month rate will drop lower than 5.85% by the time I come to re-fix in March 2025?

If I answer ‘yes’, then I should fix for 6 months today, cross my fingers, and hopefully lock in a rate lower than 5.85% in March 2025. That way, on average, I would’ve paid less than 6.35% interest over the 12-month period.

Now, between today and March 2025, we’ve got three OCR decisions on the horizon - October 9th, November 27th, and February 19th. Mark your diaries!

For the 6-month rate to drop below 5.85% by March 2025, I think we’d need to see a total of 100bps of cuts over those three OCR meetings.

Personally, I don’t see that happening. More likely we get three 25bp cuts, so I went with the 1-year rate at 6.35%.

Michelle Pearson

Managing Director and Property Investor

Michelle Pearson

Managing Director and Property Investor

Michelle Pearson began investing in property in her late twenties and has since bought, renovated, built and developed over 20 properties around the Waikato.

After a decade-long legal career, Michelle is now on the management team at Waikato Real Estate and has contributed to property articles for NZ Herald, Stuff and Property Investor Magazine.