Floating vs Fixed: Which Mortgage Type Suits Your Needs
For Kiwi homeowners and prospective buyers, choosing between a floating or fixed mortgage rate is a crucial decision that can significantly impact your financial wellbeing. Both options have their merits and drawbacks, and the right choice depends on your individual circumstances, financial goals, and risk tolerance. This article explores the key differences between floating and fixed mortgages in the New Zealand context, helping you make an informed decision.
Understanding Floating and Fixed Mortgages
Before diving into the comparison, let’s clarify what these mortgage types entail:
Floating Rate Mortgages
A floating (or variable) interest rate can change at any time, usually in response to changes in the Official Cash Rate (OCR) set by the Reserve Bank of New Zealand (RBNZ) or other market factors. When the OCR goes up or down, your mortgage rate typically follows suit.
Fixed Rate Mortgages
A fixed interest rate remains constant for a specified period, typically ranging from six months to five years in New Zealand. During this time, your mortgage repayments stay the same, regardless of changes in the broader interest rate environment.
The New Zealand Mortgage Landscape
According to the RBNZ, as of 2023, about 80% of New Zealand mortgages are on fixed rates. This preference for certainty reflects the Kiwi approach to home loan management. However, the choice between floating and fixed rates remains a personal one, influenced by various factors.
Advantages of Floating Rate Mortgages
- Flexibility: Floating rates offer more flexibility, allowing you to make additional repayments or pay off your loan faster without incurring break fees.
- Potential for Lower Rates: If interest rates fall, your repayments will decrease accordingly, potentially saving you money.
- Easier to Switch: Changing to a fixed rate or another lender is typically easier and less costly with a floating rate.
- No Break Fees: Unlike fixed-rate mortgages, floating rates don’t incur break fees if you decide to sell your property or refinance.
Disadvantages of Floating Rate Mortgages
- Uncertainty: Your repayments can increase if interest rates rise, potentially putting pressure on your budget.
- Difficulty Budgeting: The variability in repayments can make long-term financial planning more challenging.
- Stress Factor: Some borrowers find the uncertainty of floating rates stressful, particularly in a rising interest rate environment.
Advantages of Fixed Rate Mortgages
- Predictability: Your repayments remain constant, making it easier to budget and plan your finances.
- Protection Against Rate Increases: If interest rates rise, your repayments won’t be affected during the fixed term.
- Peace of Mind: You’re insulated from market fluctuations, which can be particularly reassuring during times of economic uncertainty.
Disadvantages of Fixed Rate Mortgages
- Less Flexibility: Making additional repayments or refinancing during the fixed term may incur break fees.
- Missing Out on Rate Decreases: If interest rates fall, you won’t benefit from lower repayments until your fixed term ends.
- Potentially Higher Initial Rates: Fixed rates are often slightly higher than current floating rates to account for the certainty they provide.
Current Market Trends
As of 2024, New Zealand has been experiencing a period of rising interest rates. The RBNZ has been increasing the OCR to combat inflation, which has led to higher mortgage rates across the board. In this environment, many Kiwis have been opting for fixed rates to lock in their repayments and protect against further increases.
However, it’s important to note that market conditions can change rapidly. The New Zealand property market and broader economic conditions play significant roles in interest rate movements.
Factors to Consider When Choosing
- Your Financial Situation: Consider your income stability, savings, and ability to handle potential rate increases.
- Market Outlook: While it’s impossible to predict future rates with certainty, staying informed about economic trends and RBNZ announcements can help you make a more educated decision.
- Your Risk Tolerance: If you prefer certainty and are risk-averse, a fixed rate might be more suitable. If you’re comfortable with some uncertainty and want more flexibility, a floating rate could be a better fit.
- Length of Time in the Property: If you’re planning to sell or refinance in the near future, a floating rate or shorter fixed term might be more appropriate to avoid potential break fees.
- Split Loan Option: Many New Zealand banks offer the option to split your loan between fixed and floating rates, allowing you to benefit from both options.
Expert Insights
According to mortgage advisers at Financial Advice New Zealand, the decision between floating and fixed rates should be based on individual circumstances rather than trying to predict market movements.
“It’s not about trying to beat the market,” says Sarah Thompson, a Wellington-based mortgage adviser. “It’s about choosing the option that best fits your financial situation and goals. For some, the peace of mind that comes with a fixed rate is worth paying a slightly higher interest rate.”
The Role of the Official Cash Rate (OCR)
The OCR, set by the RBNZ, plays a crucial role in determining mortgage rates. Banks use the OCR as a benchmark for setting their interest rates. When the OCR increases, both fixed and floating rates typically follow suit, although not always immediately or to the same extent.
The RBNZ reviews the OCR regularly and provides forward guidance on its likely future direction. Keeping an eye on these announcements can give borrowers insight into potential rate movements.
Choosing between a floating and fixed mortgage rate is a significant decision that depends on various factors, including your financial situation, risk tolerance, and market conditions. While fixed rates offer certainty and protection against rate increases, floating rates provide flexibility and the potential to benefit from rate decreases.
In the current New Zealand market, with its trend towards rising interest rates, many borrowers are favouring fixed rates. However, it’s crucial to remember that what works for one person may not be the best choice for another.
Before making a decision, consider seeking advice from a qualified mortgage adviser or financial planner. They can provide personalised recommendations based on your specific circumstances and the current market conditions.
Remember, your mortgage is likely to be one of your largest financial commitments, so taking the time to understand your options and make an informed decision is crucial. Whether you choose a floating rate, fixed rate, or a combination of both, ensure your choice aligns with your long-term financial goals and provides you with peace of mind in your homeownership journey.
By staying informed about market trends, understanding your personal financial situation, and seeking professional advice when needed, you can make a choice that best suits your needs and sets you on the path to financial stability and homeownership success in New Zealand.