Finding Your Ideal Home Loan: Floating rate vs Fixed rate

With the official cash rate having decreased five times over the past 12 months (with the most recent 25 basis point move being in March 2016) many mortgage-holders are no doubt weighing up their fixed versus floating home loan options.

First up, we should say that the decision to choose between a floating or fixed interest rate loan when borrowing should be made according to your own individual situation and not necessarily just because that’s what everyone else is doing! We can, however, give you a few pros and cons to think about when you’re making your decision about home loan types.

What do you need to weigh up with fixed/floating home loans?

You need to weigh up whether you want to take advantage of rate fluctuations by floating your mortgage, or whether you need 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 a tight budget

Fixed-rate home loans are certainly popular in New Zealand, with approximately 78% of visitors to Canstar’s home loan selector tables searching for a fixed-rate loan. 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, as mentioned, 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 rises, your repayments will stay the same.

Possible disadvantages of a fixed-rate home loan

  • If the RBNZ decides to cut the official cash rate –and if banks follow suit by cutting the interest rate of home loan products, you won’t get the immediate benefit of it.
  • 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 you factor this into your budget


Fixed home loans may work for you if…
Want predictable payments Are fixed home loans right for you?
Want protection against rising OCR
Get tempted to break the budget

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Floating: a home loan for playing the market

While fixed rate loans are popular, plenty of people still float their home loan rate.

Possible benefits of a floating rate home loan

  • Sticking to a floating rate home loan gives you the ability to capitalize on any downward rate movements.
  • If rates go down so do your repayments, allowing you to pay more into your loan. There is a lot of money to be saved over the long term by keeping your repayments at the same level even as interest rates head down!
  • It’s flexible: if you want to refinance, move house or exit 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 official cash rate starts increasing 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  floating home loan
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 about finding the right fit for you. After all, that knitted jumper might look absolutely smashing on your Nana but a frightful fashion crime when you try it on for size.

A home loan is a long-term prospect, so take the time to compare home loan rates, look at your own finance and budgeting style and talk to any significant others if they are involved in the process.

In the meantime, happy loan hunting!

Compare Home Loan Rates with canstar

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