Fixed vs Floating: Which Home Loan is Right for You?

When it comes to choosing a mortgage in New Zealand, one of the biggest decisions you’ll make is whether to go with a fixed rate or a floating rate (sometimes called a variable rate).

Both have their benefits and drawbacks, and the right choice often depends on your personal situation, the current market, and your risk appetite. Let’s unpack the differences so you can make an informed decision.

What is a Fixed Rate Mortgage?

With a fixed rate, your interest rate stays the same for the length of the term you choose — usually between 6 months and 5 years in New Zealand.

Advantages:

• Certainty in repayments: Your mortgage payments won’t change during the fixed term, making budgeting easier.
• Protection from rate rises: If interest rates go up, you’re locked into the lower rate.
• Peace of mind: Ideal if you value stability and want to avoid surprises.

Disadvantages:

• Less flexibility: If you want to pay off a chunk of your mortgage early or break your loan before the term ends, you may face break fees.
• Missed opportunities: If interest rates fall, you won’t benefit until your fixed term expires.

What is a Floating Rate Mortgage?

With a floating rate (variable), your interest rate can change at any time depending on market conditions and decisions made by your bank.

Advantages:

• Flexibility: You can make extra payments whenever you want without penalty. Handy if you expect a windfall, bonus, or want to chip away faster.
• Immediate benefit from rate cuts: If the Reserve Bank lowers the Official Cash Rate (OCR), your mortgage rate usually falls too.

Disadvantages:

• Uncertainty: Your repayments could go up if interest rates rise.
• Generally higher rates: Floating rates are often higher than fixed rates, meaning you could pay more over time if rates don’t fall.

Which One is Right for You?

The decision really comes down to your circumstances:

• Fixed is better if…
  • You want certainty in your repayments.
  • You’re on a tight budget and need predictability.
  • You believe interest rates are likely to rise.
• Floating is better if…
  • You plan to make lump-sum repayments or pay off your loan early.
  • You’re comfortable with some uncertainty.
  • You believe interest rates are likely to fall.

What About Splitting Your Loan?

Here’s a little secret: you don’t have to pick just one. Many borrowers split their mortgage between fixed and floating.

For example, you might fix most of your loan for stability, while keeping a smaller portion floating so you can make extra repayments without penalty. This gives you a mix of certainty and flexibility.

The Bottom Line

There’s no one-size-fits-all answer when it comes to fixed vs floating. The right option depends on your financial situation, your plans, and your risk tolerance.

A good mortgage adviser can help you weigh up your options, run the numbers, and even suggest a split strategy that balances the best of both worlds.

Choosing the right loan structure can save you thousands over the life of your mortgage — and just as importantly, it can give you peace of mind.