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Fixing mortgage knowledge gaps

One in five home owners with a mortgage don’t know that it is better to have a fixed rate rather than a floating rate when interest rates are expected to increase. That’s just one of the findings in the latest ANZ-Retirement Commission Financial Knowledge Survey.

If you’re one of the twenty percent who aren’t sure when it’s best to fix or float your mortgage, this information should help fill in the gaps:

Fixed interest rate loans

With a fixed interest loan the interest rate you pay is fixed for a period from six months to five years. At the end of the term, a fixed interest loan automatically moves to a floating rate unless you negotiate another fixed term.

Pros:

  • You know exactly how much each repayment will be over the term.
  • Rates are often lower than floating rates.
  • You can lock in lower rates if market interest rates are rising.

Cons:

  • Fixed rates often have limits on how much you can lift repayments or make lump sum payments without paying charges.
  • If you take a long term, there is a risk floating rates may drop below your fixed rate.

Floating rate (or variable rate) loans

Lenders of floating rate loans will lift or lower the interest rate as interest rates in the wider market change. This means your repayments may go up or down.

Pros:

  • You have greater flexibility to make changes without penalty - e.g. early repayment or changing the term of the loan.
  • It is easier to consolidate other costlier debt into floating rate loans by borrowing more.

Cons:

  • Floating rates have often been higher than fixed rates.
  • When rates go up the repayments also go up, putting a squeeze on your budget.

A mix of both

It is also possible to split a loan between fixed and floating rates. This lets you make extra repayments without charge on the floating rate portion while you get lower rates on the fixed portion.

Find out more about Types of mortgages.

Read the 2009 ANZ-Retirement Commission Financial Knowledge Survey.

Published 20 July 2009

Glossary: fixed rate
The rate of interest paid on a loan may be either a fixed rate or a floating rate. For a fixed rate loan, the interest rate is set at the date you take out your loan and remains the same throughout the term of your loan, irrespective of whether bank interest rates rise or fall.
Glossary: floating rate
The rate of interest paid on a loan may be either a fixed rate or a floating rate. For a floating rate loan, the interest varies from time to time. If interest rates fall, then so does the amount you have to repay. Or you can choose to continue with the same level of repayment and reduce the term of your loan. However, if interest rates rise, then the opposite effect happens, either your repayments need to be increased or the term of your loan is extended.
Glossary: interest rates
The amount of interest you pay on a loan or are paid for an investment, usually expressed in a percentage.
Glossary: lump sum
A large one-time payment of money.
Glossary: debt
Debt is what you owe - it comes in many forms, including mortgages, personal loans, credit card balances, hire purchase agreements, loans from family.
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Last post by Amelia37 at 03:19 pm on February 20, 2010

Which tends to be cheaper in the long run, fixed or variable?

Is variable likely to be more affordable in the long run in NZ - because people who opt for variable rates are taking a larger risk?

I heard of a Canadian study that showed that 88% of the time it was better for people to have a variable rather than fixed mortgage.... I don't know the details of that study, though, the reasons for it, or whether that would apply in NZ too.

Glossary: risk
An investment is normally considered to be risky if there is a reasonable chance that its value will vary significantly in the future. For example, an investment in shares is more risky than an investment in a bank term deposit. The value of shares may fall below the price paid for them while the value of bank deposits generally do not. High risk investments should only be taken on with long term intentions. You would expect a high long-term return to compensate for high risk.
Amelia37 User comment Posted at 03:19 pm on February 20, 2010

fixed rates

hi i have a morage which is half fixed and floating, the fixed part is fixed for another year, i want to extend this. Do i have to wait till my term is up, or can i go to the bank and get a longer fixed period now before my term finishes before interest rates go up

thanks

Glossary: interest rates
The amount of interest you pay on a loan or are paid for an investment, usually expressed in a percentage.
Anonymous User comment Posted at 10:08 am on January 14, 2010

Certainty of repayments with a floating rate

Thank you very much for your comment, I haven't heard that before and will definitely take that option into consideration when my mortgage comes up for renewal. Thank you for sharing great advice!

Anonymous User comment Posted at 03:49 pm on August 06, 2009

Floating rates

I note the con you list re floating rates - that if the rates rise so do your repayments. I wish to note that you can have certainty of repayments when floating which I wish more people were aware of. With the mortgages we have had to date we have agreed with our bank that when the interest rate alters, they amend our term rather than our repayments, which we keep at a fixed sum per week. This has allowed us to slash years off our terms when the rates have dropped. Of course there is the risk that when rates go up your term will increase, but our experience has been that it has most definitely worked in our favour, quite recently we took nearly ten years off our loan in the space of a few months. I would like to see more people being aware of this as an option, that if they can afford to leave the repayments where they are when the rates drop, there are big gains to be made.

Glossary: interest
Money paid in return for the use of money. If the bank is using your money (in a savings account) they pay you interest. If you are using the bank's money (via a loan), you pay the bank money.
Glossary: risk
An investment is normally considered to be risky if there is a reasonable chance that its value will vary significantly in the future. For example, an investment in shares is more risky than an investment in a bank term deposit. The value of shares may fall below the price paid for them while the value of bank deposits generally do not. High risk investments should only be taken on with long term intentions. You would expect a high long-term return to compensate for high risk.
Anonymous User comment Posted at 03:46 pm on July 23, 2009
 
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