There is a lot of talk about interest rates these days – and with good reason! Buying a property most likely will be the most expensive purchase you ever make, and unless you just so happen to have $1,000,000 burning a hole in your pocket you are going to need to lend the money for your house. In other words, you need a mortgage. And mortgages come with an interest rate.

The interest rate is basically the money you pay the bank for lending you the money to buy your dream home. At the moment interest rates are high, meaning getting a mortgage is more expensive. But, interest rates are always changing, and eventually they will come back down again (although no one can tell you exactly when that time is).

Floating vs. fixed rate

First things first, what is the difference between a floating and a fixed rate? 

A fixed-rate mortgage “locks” the interest rate for a set period. Usually, this period goes from six months to seven years, however, most banks only go to five years. For instance, you may be able to fix your mortgage at 6% for one year. This means that for one year you will be paying 5% in interest rates on every single mortgage payment for 12 months. If the interest rates go up, you’re still locked in at 5%. If the interest rates go down, you’re also still locked at 5%.

This also means that you know exactly how much your repayment is every week, making it very easy to budget with. It offers you financial security.

After your period ends (in this example it would be after 12 months), you have the option of re-fixing your mortgage at the interest rates available at the time or you can opt for the floating rate.

Please note that the interest rates can differ depending on the bank and how long you are looking to fix your mortgage for.

Let’s look at floating rates. As the name suggests, the rate is, well, floating. This means the interest rate can go up and down. Essentially, this means that your repayments can change from week to week, meaning you have less certainty.

The pros of the floating rate are that you have more flexibility to pay off your mortgage faster, and you don’t have to pay repayment fees if you sell your house early and pay off your mortgage (which you may need to do if you have a fixed interest rate).

But, what should I choose?

It is very common to use a mix of the two. For instance, some people choose to fix the majority of their mortgage, providing them with financial certainty. However, they may choose to leave a small portion of the mortgage on a floating rate. In order to do so, people usually use a revolving credit or an offset account, giving them the opportunity to make additional payments to the mortgage, and thereby paying the loan down more aggressively.

Naturally, you should always discuss this with a financial advisor so you choose the right option for you.

So how long should I fix for?

Well, that is the question, isn’t it? Unfortunately, there is no one-sizes-fits-all when it comes to how long you should fix your mortgage for. It will depend on your individual situation (hence, why you need to work with a mortgage broker).

Generally, more conservative, cautious people tend to fix their rate for longer. If you need ultra certainty and you don’t have a lot of wiggle room in your budget, fixing for longer may be the best option.

If, however, you don’t mind the uncertainty of the market, and you know it won’t affect your budget too much if the interest goes up and you therefore need to make higher repayments, then fixing for just one year may be the best option for you. 

Naturally, it also depends on where you think interest rates are going. If you have a strong feeling interest rates will go up, up, up, then you may wish to fix for longer. If, on the other hand, you believe interest rates are coming back down, fixing for shorter may be better.

Of course, if you are planning on selling your house in two years, you shouldn’t fix your loan for five years. Otherwise you could face large break fees and no one wants that.

So there is no clear-cut answer when it comes to interest rates. It all depends on your unique financial situation, which is why we always recommend you talk to a mortgage broker so you can get advice tailored to your financial situation.

Disclaimer:

Everything shared in this blog post is the opinions of The Mortgage Whanau, and it is general advice. Furthermore, the examples used in this blog post are fictional and are only meant to illustrate a point. For tailored advice, you need to talk to a mortgage broker. You can book a strategy session with us here.