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