Fixed Rate vs Floating Rate Mortgage

 

You’re in the market for a new house. A big step. One where you hope to make all the right moves. Buying a home is an investment. A long-term commitment. And there are plenty of questions to answer before making one of the most significant decisions of your life. Are you prepared to settle down in your new dwelling for the foreseeable future? Do you have the finances to maintain mortgage contributions over what will seem an eternity? Do you see yourself living in the property in 10 years’ time? How about 20?  The home buying process in New Zealand is fairly complex to the uninitiated. Check out our home buying guide  as we simplify the process for you.

Let’s get back on track…

The purpose of this piece assumes we do have answers to the above questions while taking a more direct approach to the financing side of the mortgage for your new home. In particular, deciding between a fixed or floating mortgage rate and what appears the best fit for you?

 

What is a fixed rate mortgage?

The interest rate for a fixed rate mortgage remains set, constant over the duration of the mortgage period. For example, you may have a 2 year fixed rate of 5.70%. This means for the 2 year period you will pay an exact figure per payment off your mortgage.

Pros

Consistency & Control: You have a fixed repayment amount to make over the length of the term. Simple. This makes budgeting that much easier as you know the exact figure to be paid toward the mortgage and you can plan in advance. You have greater control here.

Safe: Similar to our consistency factor. If you feel you’ve got an excellent rate, then you can capitalise on this and lock in the rate for the duration of the term.

 

Cons

Missed chances for lower payments: Unlike a floating rate mortgage, even if market rates decrease, you will be forced to make the same regular fixed payment amount, set upon your original agreement.

Inability to make early or lump sum repayments: A fixed rate mortgage does not allow you the ability to make additional contributions to your home loan. You will need to re-negotiate or re-structure terms of your agreement without being penalised by fees.

 

What is a floating rate mortgage?

This is more variable, as the interest rate changes in relation to fluctuations with the OCR and greater market conditions and trends.

Pros

Opportunity: With a floating rate mortgage you do have the ability to make early or lump contributions without incurring penalty. You can capitalise on a period of lower interest rates by making additional repayments during this time.

Risk: There is the possibility that interest rates may decrease which results in lower payment amounts for you. The rates could increase though…

 

Cons

Risk: The main deterrent of a floating rate mortgage is the degree of risk. The interest rate may drop, but, and it’s a big but, they may also soar which will cost you.

Inconsistency/Doubt: Opposite the pros for a fixed rate mortgage; floating rates provide uncertainty, which makes budgeting and planning difficult.

 

Why not both?

The best of both worlds. Consider segmenting your mortgage, with your loan divided up into part fixed and another floating. This way you can hedge your bets and capitalise on low rates when presented, while also having the safer degree of risk of a fixed rate mortgage.

Choosing the rate that suits you is like finding the home of your future. What may appeal to others may not be to your liking or your own style and operation of budget. Be patient. A home loan is a long-term commitment so take the time to compare market rates. Do your homework, to find the best approach and fit for you.

 

In the meantime good luck finding your new home.

 

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