Jun

NZ Mortgages: Better to Fix or Float?

When purchasing property, you will almost always need to lend money from the bank. This particular loan is called a mortgage and it will require you to pay interest.

In New Zealand, you’re given the chance to choose your interest rate. The two most popular options are fixed and floating. Here we introduce both of their benefits along with our suggestions for choosing a mortgage interest rate in 2020.

What Is a Fixed Rate?

A fixed rate is an agreement between yourself and the bank to pay the same interest rate for a set length of time.

The length of fixed rates can vary anywhere from 6 months to 10 years (will also differ depending on bank). Come the end of your agreement, it will be your decision to either sign on to another fixed rate or change to a floating rate.

The main benefit of opting for a fixed rate is that you gain what little control you can over what you pay. You know exactly what is owed and it won’t be subject to change of the economy.

What Is a Floating Rate?

A floating rate does the opposite of one that’s fixed. Instead of agreeing to a set percentage, your interest rate will move as the economy does. Or more specifically, it will change with the official cash rate (OCR).

Upon agreement, New Zealand’s current OCR will become your interest rate for the time being until it changes again. Because a floating rate will adjust as the market does, you do have the risk of fluctuating rates.

Along with the possibility of an interest rate decrease, the main benefit of floating rates is that the agreement has no permanent length. Such flexibility allows you more time to assess the market and freedom to change to a fixed rate whenever you like.

Interest Rate Movements: March 2016 - July 2020

Below you will find three types of interest rate options and their movement across the last four years. Take a close look and consider what changes might come in the next update.

Floating rate: The highest rate but also the one providing the greatest flexibility.‍
Fixed rate (1 year): The cheapest rate.‍
Fixed rate (4 years): The generally consistent, median rate.

Strategies for Minimising Interest

With years of data, we have the ability to make assumptions on where interest rates are going next. But without knowing this for certain, what strategies should you be taking in order to minimise interest rates?

From our experts, here are the top suggestions:

For most cases, a short-term fixed rate of 6 - 12 months will be your cheapest option. It’s smart to opt for this if interest rates are falling (which is predicted for the next 18 months).
Should interest rates be rising, consider choosing a fixed rate that is slightly longer. An ideal length would sit between 1 - 2 years and no longer.
Only use the floating rate if you’re expecting to repay in lump sums. This rate works best as you can choose any time to make payments and do so without penalty.