Whether you’re a first home buyer or a homeowner looking to refinance, choosing the right mortgage structure is a key decision that can have long-term effects on your financial health. In New Zealand, you’ll face the important choice between fixed and floating mortgage rates. Understanding these options, as well as how they relate to refinancing and home loans, is essential to making an informed decision that aligns with your financial goals.
Understanding Fixed and Floating Rates
Let’s start with the basics: what do fixed and floating mortgage rates mean, and how do they work in the context of the New Zealand market?
- Fixed mortgage rate: A fixed-rate mortgage locks in your interest rate for a set period – usually 1 to 5 years. This means your repayments are predictable, no matter how the Reserve Bank of New Zealand’s Official Cash Rate (OCR) fluctuates.
- Floating mortgage rate: A floating-rate mortgage, also known as a variable-rate mortgage, is tied to the OCR. Your interest rate can change over time, meaning your repayments may increase or decrease depending on rate movements.
Pros and Cons of Fixed Mortgages
Benefits:
- Predictability and Stability: One of the key advantages of a fixed mortgage is the stability it offers. With fixed repayments, you can better manage your monthly budget and avoid unexpected fluctuations.
- Protection Against Rate Hikes: If the OCR rises, your repayments won’t change, providing protection against future interest rate increases. This can be especially useful in an environment where rates are expected to go up.
Downsides:
- Less Flexibility: Fixed-rate mortgages typically have fewer options for making extra repayments without incurring penalties. If you want to pay off your loan early or make lump sum repayments, you may face restrictions.
- Break Fees: If you decide to refinance or pay off your mortgage before the fixed period ends, you could incur break fees which can be costly, particularly if you have a long term remaining.
Pros and Cons of Floating Mortgages
Benefits:
- Repayment Flexibility: Floating mortgages offer the flexibility to make extra repayments without penalty, allowing you to reduce your loan balance more quickly and save on interest over time.
- Potential Savings with Lower Rates: If interest rates decrease, your repayments will also decrease, which can result in savings. Homeowners who are comfortable with fluctuating rates may benefit from this in a lower-rate environment.
Downsides:
- Interest Rate Volatility: The most significant disadvantage of floating rates is their unpredictability. If the OCR rises, your repayments will increase, which can put a strain on your budget.
- Higher Costs if Rates Rise: If interest rates rise significantly, your mortgage repayments could become substantially higher, increasing your overall borrowing costs.
Factors to Consider When Choosing
When deciding whether to go with a fixed or floating mortgage, it’s important to take several factors into account:
- Current Interest Rate Trends: If interest rates are low, a floating-rate mortgage might be appealing, as it allows you to take advantage of current rates. However, if rates are expected to increase, fixing your mortgage may offer greater security.
- Personal Financial Situation: If your income is stable and predictable, a fixed-rate mortgage could offer peace of mind. If your financial situation is more variable or you expect changes, the flexibility of a floating rate may suit you better.
- Refinancing Considerations: Homeowners considering refinancing should evaluate the remaining term on their current mortgage. Refinancing may be easier with a floating mortgage, but those with a fixed-rate mortgage might face break fees. Refinancing could be a good option if rates are low, allowing you to secure a better rate and reduce overall borrowing costs.
- Short-Term vs Long-Term Plans: If you’re looking to buy a home and plan to sell or refinance in a few years, a floating mortgage might be a better fit. For long-term homeowners who want to stay in the property for many years, a fixed mortgage may provide greater stability and security.
Split Mortgages: A Hybrid Option
If you're unsure between fixed and floating rates, consider a split mortgage – a hybrid approach that allows you to divide your loan between fixed and floating portions. This option can offer a balance between stability and flexibility. For example, you might fix 70% of your mortgage to ensure stability in repayments while leaving 30% on a floating rate to benefit from any interest rate drops, or to make extra repayments without penalties.
Tips for First Home Buyers and Homeowners Considering Refinancing
For first home buyers and homeowners looking to refinance, here are some tips to ensure you make the best decision for your mortgage needs:
- Assess Mortgage Affordability: Use our mortgage calculator to assess what repayments you can afford, based on your income and expenses. This can help you determine which mortgage structure makes the most sense for your financial situation.
- Consult Mortgage Brokers: Mortgage brokers can provide expert advice and help you navigate the complexities of securing a home loan or refinancing. Our friendly mortgage advisors can also help you compare different lenders and mortgage products to find the best deal for you.
- Monitor Interest Rate Changes: Stay up to date with changes in the OCR and broader market trends. This will allow you to make more informed decisions about your mortgage and whether it’s the right time to refinance or switch between fixed and floating rates.
- Review Your Mortgage Regularly: If you’ve been in your home for several years or have already refinanced, it’s a good idea to review your mortgage periodically. Refinancing at the right time can help you lower your borrowing costs and improve your financial situation.
Choosing the right mortgage is an important decision for first home buyers and homeowners looking to refinance in New Zealand. Whether you opt for a fixed-rate mortgage for stability or a floating-rate mortgage for flexibility, it’s essential to carefully evaluate your financial situation and long-term goals.
Contact us today to get started!
Disclaimer: The information in this article should not be taken as financial advice, or a recommendation of any financial product. Vega shall not be liable or responsible for any information, omissions, or errors present. We recommend seeking professional mortgage advice before taking any action.
