Pro's and Con's to Fixing or Floating your Home Loan

7 December 2016
“Fixed or floating?  And if fixed for how long”.  This is probably the question that we are asked the most as mortgage advisers.  The usual response, “it totally depends on you and your current situation and what your short and medium term goals are” is hardly a satisfying answer but is the accurate reply. However, it made me think that it may be a good time to provide a summary of the advantages and disadvantages of fixed and floating rates.  
Floating or Variable rates are rates that are governed by the Official cash rate (OCR).  Generally, if the OCR goes up the floating rate goes up.  If the OCR goes down the floating rates go down. The advantage of a floating rate is flexibility, as it provides an opportunity to pay off lump sums of your home loan without any early payment penalty. For those who wish to clear their debt at a faster rate it is the most cost effective option.  
The disadvantage of a floating rate would be if rates climb earlier or faster than the Reserve bank have indicated, meaning an increase in loan repayment costs. Floating rates offer less certainty and those on tight budgets may prefer the certainty of fixed rates.
Fixing for the short term i.e.1 to 2 years offers the advantage of having the lowest current mortgage rate and cheaper immediate costs.  Repeatedly rolling over a shorter term loan for the next few years may produce a lower average cost than fixing for 4 – 5 years.  However the major disadvantage with the shorter fixed terms at present is that they provide less protection against sharp lifts in interest rates.  Especially if rates move earlier and at a faster rate than expected. The one year fixed rate would suit only those who prefer some certainty but focussed on lower interest rates for a shorter term due to possible changes in their personal situation in the near future.
The mid-range three year term provides more certainty especially if the RBNZ lifts rates earlier and sharper than expected. With rates below 5% the pricing is still very good although in comparison to other shorter term rates this longer certainty comes at a slightly higher cost.  
The five year fixed rate provides the most long-term certainty of all the interest rates but is the most expensive at present.  It provides stability and peace of mind in case future interest rates lift dramatically. The disadvantage in fixing for 5 years is that the immediate cost is higher and if rates don’t climb significantly in the short to medium term, then you may end up paying a higher price for your home loan over the five years.  
Hindsight is the only way to tell in the next 5 years if we got our borrowing strategy right or wrong. Often a mix of floating, short and long term fixes could be the best option for those with larger home loans. But you can see that the answer to the question to fix or float is not as simple as it seems. Talk to your home loan adviser who can assess your current situation, your immediate, medium and long term plans and match these with expected market fluctuations to provide a balanced response that gives you the best possible chance in getting it right. 

Published In Whakatane Beacon

This post was written by

John White - who has written 90 posts

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