Floating rates are the new black when it comes to mortgages and Kiwis are signing up in their droves.
About half of all new mortgages at one main Bank, for example, are on floating rates, compared to 40% of its existing customers. Even more are expected to switch next year when their current fixed periods expire.
Yet just a few years ago, most home owners wouldn’t dream of doing anything other than fix.
It’s natural for people to choose the mortgage that has the lowest payments currently. Why pay $1,337.94 monthly on a floating table mortgage on a $200,000 loan, when at the same bank on the floating rate of 5.75 you’d be paying $1,258.21?It’s nearly 100 bucks for nothing. Or so it may seem.
Home owners often forget that choosing to go on the floating rate adds risk to their financial situation. That’s the risk of interest rates changing and their payments jumping suddenly to a level that they can’t afford.
Conversely, with a fixed rate they get certainty. Should interest rates rise sharply, the monthly fixed-rate payments won’t increase and the home owner can breathe a huge sigh of relief.
On the other hand, choosing a fixed rate can have dire consequences when rates are high, but expected to fall.Pity the poor person who fixed his or her rate at 9.5% for five years in April 2008. A mere nine months later the average floating rate had fallen to 6.82% and has been below that ever since.
There was a lot of concern from people who gambled and lost, finding that it would cost them a king’s ransom to get out of the fixed rate products because of break fees.
Despite this example, the vast majority of people end up paying much the same over the life of the mortgage whether or not they fix.
One way to hedge bets is to split a mortgage into two or three portions. Have one on the floating rate and the other two on different fixed rates.That spreads the risk of massive rises or falls in the interest rate