Co-author: Michelle Norton
With market rates constantly changing, mortgage holders and home loan applicants should weigh up their fixed and floating home loan options. Use this guide to help identify your ideal home loan.
First up, the decision to choose between a floating or fixed interest rate loan when borrowing should be made based on your own individual situation and not because that’s what everyone else is doing! Here are a few pros and cons to think about when you’re making your decision about home loan types.
Fixed/ floating home loans: what you need to weigh up
You need to consider whether you want to take advantage of rate fluctuations by floating your mortgage, or whether you need the certainty of monthly repayments.
Fixing your home loan rate means you know exactly what you have to pay every month and there are no nasty surprises if rates go up in the meantime. This gives peace of mind to those on a fixed income who may have some difficulty stumping up extra cash at the whim of their lender.
Floating, on the other hand, allows you to play the market more. If rates go down, so do your repayments. However, the opposite is also true.
Here are some pros and cons of each – and you can compare home loans here.
Fixed home loans: might suit tight budgets
Fixed rate home loans are certainly popular in New Zealand. This is not surprising, with current average fixed rate loans on Canstar’s database cheaper across all loan terms than the average floating rate.
Possible benefits of a fixed rate home loan
- You know exactly what your repayments are until the end of the fixed term, which can be useful for those on a tight budget.
- Currently, the average fixed rate home loan interest rates are lower than the average floating rate home loan interest rate.
- If you are on a fixed rate home loan contract and the Official Cash Rate (OCR) rises, your repayments will stay the same.
Possible disadvantages of a fixed rate home loan
- If the Reserve Bank of New Zealand decides to cut the OCR – and if banks follow suit by cutting the interest rate of home loan products, you may find that your repayment rate is higher than the market rate.
- Break fees on fixed rate home loans can be hefty if you sell or want to get out of the loan before the fixed term is up.
- When the fixed term is up, you may have to revert to a higher rate in accordance with rate movements at the time – make sure to factor this into your budget!Fixed home loans may work for you if you….
- Want predictable payments.
- Want protection against rising OCR.
- Get tempted to break the budget.
Floating home loans: ideal for playing the market
While fixed rate loans are the most commonly held home loan type in New Zealand, plenty of people still float their home loan rate.
Possible advantages of a floating rate home loan
- Sticking to a floating rate home loan gives you the ability to capitalise on any downward rate movements.
- If rates go down, so do your repayments, allowing you to pay more into your loan. This could save you money in the long term.
- It’s flexible: if you want to refinance, move house or terminate your home loan contract for any other reason, you can!
Possible disadvantages of a floating rate home loan
- If rates go up you have to find money for higher repayments. This might be challenging if you are on a tight budget.
- If the OCR starts to increase rapidly, you may find that it’s too late to lock in a favourable fixed home loan rate.
Floating home loans are worth considering if you…
- Want the chance to capitalise on downward rates.
- Want smaller repayments if rates go down.
- Want flexibility to refinance e.g. if you move house.
But, when it really comes down to it, choosing a home loan is all about finding the right fit for you given that it is a long-term prospect. It’s important that you take the time to compare home loan rates, work out your finance and budgeting style, and discuss with others who may be involved in the home loan application.