Imagine you’re about to make the biggest financial decision of your life. You’re standing at a crossroad, and the path you choose will impact your finances for years to come.

Do you go for stability or flexibility?

This is the dilemma many Kiwis face when deciding between fixed and floating mortgage rates.

In New Zealand’s ever-changing housing market, understanding the difference between these two options is crucial. It is not just about picking the lowest number you see; it’s about finding the right fit for your financial situation and future plans.

In this article, let us dive into the world of mortgage rates and figure out which option might be best for you.

Don’t worry – we’ll keep things simple and sprinkle in some real-life examples to help you understand the impact of these choices.

What Are Fixed and Floating Rates?

Before we go any further, let’s break down what these terms actually mean.

Fixed rates are like a contract with your bank. You agree to pay a specific interest rate for a set period, usually between 6 months to 5 years. As of October 2024, major NZ banks are offering fixed rates ranging from 5.69% to 7.59% (conditions apply), depending on the term.

Floating rates, on the other hand, are like going with the flow. Your interest rate can change at any time, usually in response to changes in the Official Cash Rate set by the Reserve Bank of New Zealand and / or other local and global factors. Currently, floating rates from major banks hover around 8.39% to 9.19%.

Now that we’ve got the basics down, let us look at the pros and cons of each option.

The Case for Fixed Rates

Pros:

• Predictability: With a fixed rate, you know exactly what your mortgage payments will be for the duration of the term. This makes budgeting a breeze.
• Protection against rate increases: If interest rates go up, you’re safe in your fixed-rate bubble.

Cons:

• Missing out on lower rates: If rates drop, you’re stuck with your higher rate until the fixed term ends.
• Break fees: Want to pay off your mortgage early or switch to a better deal? Be prepared for potentially high break fees.

In early 2022, our clients Rony and Kayla decided to fix their mortgage at 5.99% for three years after consulting with us. When interest rates began to rise later that year, they were relieved, while their neighbors, who had chosen a floating rate, saw their monthly payments increase by $300. However, if fixed rates had dropped, the situation could have been different.

The Case for Floating Rates

Pros:

• Flexibility: You can make extra repayments without penalties, helping you pay off your mortgage faster.
• Potential savings: If rates drop, you immediately benefit from lower repayments.

Cons:

• Uncertainty: Your repayments can change at any time, making budgeting more challenging.
• Risk of rate increases: If rates go up, so do your repayments.

Consider the Nguyen family. They chose a floating rate in 2020 when rates were at historic lows. As the economy recovered and rates dropped even further, they were able to make significant extra repayments, shaving years off their mortgage. However, they’ve had to tighten their belts when rates reached an all time high.

When to Choose Fixed Rates

Fixed rates might be your best bet when:

• Interest rates are low and expected to rise
• You need certainty for budgeting
• You’re not planning to sell or refinance soon and the rates are favourable.

When deciding on a fixed term length, consider your future plans. A longer term offers more stability but less flexibility. Most of our clients opt for a 1-2 year fixed term as a balance between security and adaptability.

When to Choose Floating Rates

Floating rates could be a good choice when:

• Interest rates are high and expected to fall
• You want the flexibility to make extra repayments
• You are planning to sell or refinance in the near future

To manage the risks of floating rates, consider setting aside some savings as a buffer against potential rate increases. Also, stay informed about economic trends that might impact interest rates.

Having a dedicated and experienced mortgage adviser, like the team at Financial Advisers NZ, can provide a significant advantage when making these important decisions.

The Hybrid Approach: Splitting Your Mortgage

Can’t decide between fixed and floating? Why not have both? Many New Zealanders opt to split their mortgage, fixing a portion and leaving the rest floating.

Here’s how it works: Let’s say you have a $500,000 mortgage. You might decide to fix $400,000 at 6.59% for two years and leave $100,000 floating at 8.79%. This gives you some certainty with your repayments while still maintaining flexibility to make extra repayments on the floating portion.

Bina and Gary took this approach when they bought their first home in Auckland. They fixed 80% of their mortgage for peace of mind but left 20% floating. This allowed them to use work bonuses and tax refunds to make extra repayments, slowly but surely chipping away at their mortgage.

How to Make Your Decision

Choosing between fixed and floating rates isn’t a decision to be made lightly. Here are some tips on how to approach it:

• Assess your financial situation: Consider your income stability, savings, and future plans.
• Research current rates and economic forecasts: Use comparison websites to see what different banks are offering. Keep an eye on economic news that might impact interest rates.
• Use online calculators: Many banks offer mortgage calculators that can help you compare different scenarios.
• Seek professional advice: A mortgage broker or financial advisor can provide personalized guidance based on your specific circumstances. Reach out to us for a free consultation.

Remember, there is no one-size-fits-all solution. What works for your mate down the road might not be the best option for you.

Moving Forward

Choosing between fixed and floating mortgage rates is a bit like trying to predict the weather in Wellington – it’s not always easy, but having the right information can help you make a better decision.

Fixed rates offer stability and peace of mind, especially in a rising interest rate environment. Floating rates provide flexibility and the potential to save if rates drop. And for those who want the best of both worlds, splitting your mortgage could be the way to go.

Whichever option you choose, stay informed about market trends and be prepared to reassess your decision as your circumstances change.

Remember, your mortgage is likely to be with you for a couple of decades – it’s worth taking the time to get it right. At the end of the day, the best mortgage is the one that lets you sleep soundly at night, knowing you have made the right choice for your financial future.

So, whether you decide to fix, float, or split, make sure it’s a decision that aligns with your goals and gives you confidence in your homeownership journey. After all, your home should be a source of joy, not stress.

Happy Days!!!