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23 November 2021 | By Lending People

To fix or to float? Know your interest rate options.

Exploring your home loan options in NZ? We've explained the differences between fixed, floating and mixed interest rates—and the pros and cons of each.

To fix or to float? That is the question. There’s a lot to consider when choosing the right home loan for you and the structure of your interest rates are a significant consideration. Interest rates can be fixed, floating or a mix of both. There are pros and cons to each option which we’ll get into now. Weigh them up, have a chat with our financial advisers for guidance and see what appeals to you.

Fixed interest rates

A fixed interest rate is locked in for a specified time, agreed to by you and your lender—it can be fixed for anywhere from six months to five years. When you reach the end of the term, you can decide whether to fix an interest rate again or switch to a floating rate.

Pros:

· No surprises—you always know how much all your repayments will be.

· Lenders may compete to offer you a lower fixed rate.

· You can secure a lower rate when interest rates are on the rise.

Cons:

· More restrictions—it’s likely you’ll be charged fees if you want to make bigger or more frequent repayments than what is outlined in your loan terms.

· If you agree to a longer-term, you risk paying more if interest rates drop.

· You may be charged a ‘break fee’ if you sell the property or alter the loan. If you switch to a new lender, they may cover the break free.


Floating interest rates

Also known as variable interest rates, these will fluctuate depending on what the market interest rates are doing, so the cost of your repayments will change over your loan term.

Pros:

· More flexibility—often, you can make extra or larger repayments or change the terms of your mortgage without being charged fees.

· Debt consolidation is more manageable with floating interest rates since there aren’t break fees.

Cons:

· Less control—when market interest rates go up, so do yours, so at times you’ll pay more.

· Floating rates are often higher than fixed interest rates.

Mixed rates

You can choose to split your home loan so that a portion of it has a fixed interest rate and the rest has a floating rate. How you split is up to you.

Pros:

· Best of both worlds—flexibility and security.

· The portion of your loan that is fixed retains the (usually lower) interest rate.

· The portion of your loan that is floating allows you to make extra repayments without incurring fees, which means you have the opportunity to pay off your mortgage faster.

Cons:

· Each portion of your home loan is still subject to the cons that come with fixed and floating rates.

Different home loans will suit different people. We work with some of New Zealand’s most trusted lenders and compare them against each other to find the mortgage that works best for each person’s unique circumstances. If you want to see what we can offer you, or if you want to chat to an adviser about your options, apply online, and we’ll get in touch.

This blog is provided for general information purposes and is not a recommendation you enter into or exit any particular home loan. Information on the blog does not consider your particular circumstances, including your objectives, financial situation or needs. We recommend you seek advice from a financial adviser before taking any action as appropriate. The Lending People Limited (FSP240365) is a licensed financial advice provider and can provide advice on some types of personal loans, home loans and insurance. Find out more about The Lending People and how we may be able to help you.

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²Annual Interest Rate (AIR): The AIR offered by our Personal Loan providers ranges from 6.95% p.a. to a maximum of 26.95% p.a.

³Annual Percentage Rate (APR): Also known as the 'comparison rate', the APR is calculated by adding together the AIR plus any additional fees that may apply (like establishment fees charged by providers). New Zealand law does not require APR disclosure, but doing so can better highlight borrowing costs. The APR offered by our Personal Loan providers ranges from 7.80% p.a. to a maximum of 27.91% p.a. The APR is accurate only for the representative example given below and may not include all fees like early repayment fees (if any). Different terms, fees or other loan amounts might result in a different APR.

⁴Minimum and Maximum Repayment Terms: Repayment terms offered by our Personal Loan providers range from 12 months to a maximum of 84 months.

Representative Example of the Total Cost of a Loan: If you borrow $20,000 over a repayment term of 36 months at an AIR of 6.95% p.a., your total repayments will be $22,493 (made up of $20,000 principal, interest charges of $2,243, and an establishment fee of $250). This example assumes monthly repayments and does not include premiums for any optional insurances, fees for using our services (if any) or default fees.

⁵Terms and Conditions: Our services are provided in accordance with our Application Terms & Conditions. All approvals are subject to provider credit criteria and responsible lending requirements. The loan amount and interest rate offered will depend on your circumstances, the type of lending required, and the security (if any) provided will reflect the loan amount and interest rate offered by the provider. Provider establishment fees, terms, and conditions apply.