Fixed vs. Floating Mortgages in 2025: How to Make the Best Choice for Your Financial Future

The decision between fixed and floating interest rates remains pivotal for borrowers aiming to optimise their financial outcomes. Recent trends and expert analyses provide valuable insights into making informed choices in 2025.

Current Market Trends

As of early 2025, there is a notable inclination among borrowers towards shorter-term fixed rates and floating rates. Data from CoreLogic indicates that four out of five borrowers began the year with either a floating mortgage rate or a fixed term of less than 12 months. Specifically, only 10% of new loans were fixed for 12 months or longer, a significant decrease from 51% the previous year. Additionally, the share of new loans on floating rates has risen from around 17% a year ago to 28%.

Fixed Interest Rates

Fixed interest rates offer stability, as the rate remains constant over a predetermined period, typically six months to five years. This predictability aids in budgeting, ensuring consistent repayment amounts. However, fixed rates often have less flexibility, and making extra repayments or paying off the loan early may incur penalties. Additionally, fixed rates can sometimes be higher than floating rates, potentially leading to higher overall interest costs if market rates decrease.

Floating Interest Rates

Floating, or variable, interest rates fluctuate in response to market conditions, often influenced by changes in the Official Cash Rate (OCR) set by the Reserve Bank of New Zealand. This means your repayments can increase or decrease over time. The primary advantage of floating rates is flexibility; borrowers can make extra repayments or pay off the loan early without incurring penalties. However, floating rates are generally higher than fixed rates, and the variability can make budgeting more challenging.

Strategies for Combining Fixed and Floating Rates

Many borrowers opt for a blended approach, dividing their mortgage between fixed and floating rates. This strategy provides the stability of fixed repayments while retaining the flexibility to make additional payments on the floating portion. For instance, you might fix a portion of your loan to secure a lower rate and set the remainder on a floating rate to allow for extra repayments, thereby accelerating debt reduction without facing penalties.

Interest Rate Outlook for 2025

Economists anticipate further reductions in the OCR throughout 2025, which could influence mortgage rates. ASB predicts a 50 basis point cut in February and two 25 basis point cuts in April and May, bringing the OCR to 3.25%. This scenario suggests a slight easing bias for short-term mortgage rates in the first half of 2025, with long-term rates remaining stable or possibly increasing.

Considerations for Borrowers

Given the dynamic nature of interest rates, borrowers must stay informed about market trends. Regularly reviewing your mortgage terms and consulting with financial advisers can help ensure you are in the best financial position. For example, if market indicators suggest a decrease in interest rates, you might consider opting for a shorter fixed-term or a floating rate to take advantage of future rate cuts. Conversely, if rates are expected to rise, locking in a fixed rate could provide cost savings over time.

Conclusion

Both fixed and floating interest rates have their respective benefits and drawbacks. By understanding these options and staying attuned to market developments, borrowers can tailor their mortgage strategies to align with their financial goals and risk tolerance.