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Fixed Rates vs. Floating Rates: Choosing the Right Mortgage Option for You

Understanding Fixed Rates

Fixed-rate mortgages involve entering into an agreement with your lender—typically a bank—where you commit to paying a set interest rate over a specified period. In New Zealand, you can typically fix your mortgage rate for periods ranging from 6 months to 5 years, with various increments like 12, 18, 24, 36, 48, and 60 months also available.

The attractiveness of fixed rates often depends on the economic climate. For example, as of June 2024, shorter-term rates (such as 6 and 12 months) are higher, while longer-term rates are somewhat lower. This trend can fluctuate significantly; during the peak of the COVID-19 pandemic, we saw exceptionally low short-term rates, with longer-term rates slightly higher.

Fixed rates are particularly beneficial if you have a stable income and your financial situation is unlikely to change significantly during the term of the mortgage. They offer the peace of mind that comes with knowing exactly what your payments will be, allowing for easier budgeting and financial planning.

However, one downside to consider is the potential for break fees. If you decide to sell your property or need to alter your mortgage arrangement within the fixed term, breaking this agreement can incur substantial fees. We've observed break fees ranging from $12,000 recently up to $25,000 historically, depending on the loan amount and the remaining fixed term.

The Appeal of Floating Rates

Conversely, floating rates offer greater flexibility but at a higher cost. The floating rate is typically about 1.5% higher than comparable fixed rates, reflecting the premium for flexibility. With a floating rate mortgage, you can make extra payments or pay off your loan early without incurring penalties. This can be incredibly advantageous if your income is variable—for instance, if you earn a base salary plus commission, allowing you to pay off large sums when you have extra cash.

Floating rates are ideal for those who value flexibility over predictability. They allow you to capitalize on good financial months to reduce your debt quicker, without the restrictions of fixed terms.

Other Options: Revolving Credit and Offset Accounts

Beyond standard fixed and floating rates, there are other mortgage structures to consider, such as revolving credit facilities and offset accounts. Revolving credit acts like a large overdraft, where your credit limit decreases as you pay off the loan but can be redrawn up to the original amount. An offset account allows you to use the funds in your savings accounts to offset the interest costs on your mortgage, potentially saving you money in interest over time.

Making the Right Choice

Choosing between a fixed and a floating rate mortgage largely depends on your personal circumstances and financial stability. If consistency and predictable payments are crucial for your budgeting needs, a fixed rate might be the way to go. On the other hand, if you prefer the ability to adjust payments based on your financial situation and take advantage of paying off large sums without penalty, a floating rate could offer the flexibility you need.

Need More Information?

Deciding between a fixed and floating rate mortgage is a significant decision that can impact your financial future. If you're unsure which option is best for you, or if you have any specific questions about your situation, feel free to reach out. At My Mortgage, we’re here to help you navigate these choices and ensure you make the best decision for your financial health.

Remember, every financial situation is unique, and choosing the right mortgage type is crucial in managing your finances effectively. Let’s make sure we choose wisely!


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