Interest rates have hit record lows over the past year, but an improving economy is likely to put pressure on interest rates rising sooner than expected. Locking in a fixed home loan rate could be the answer for borrowers seeking certainty for a fixed term. As always though, the best solution depends on borrower’s own circumstances and it’s advisable to seek advice from a mortgage adviser before making any interest rate decisions. If you are considering fixing your home loan rate, here are 5 questions to ask.
1. What’s the difference between variable and fixed mortgage rates?
As the term implies, variable interest rates move up and down with fluctuations to the official cash rate (OCR) as determined by the Reserve Bank of New Zealand. Fixed mortgage rates on the other hand, are not responsive to any movements in the OCR and remain fixed for a set period of time.
2. What are the pros and cons of each loan type?
Variable home loan interest rates:
- More flexibility in how much you pay.
- Make extra repayments without facing penalties.
- No break fee if you decide to fix part of your mortgage at any time.
- If the OCR goes up, it’s likely your home loan rate will go up, while a decrease in the OCR will mean a lower mortgage interest rate and lower repayments for you. This could make it difficult for you to budget your home loan repayments.
- Tend to be higher than fixed home loan rates.
Fixed home loan interest rates:
- Borrowers have certainty, knowing exactly how much they’re expected to pay for the term of the fixed loan. This can make budgeting and financial planning much simpler.
- If interest rate rises seem inevitable, locking in a favourable fixed interest rate could actually save you money.
- If interest rates drop you won’t see the benefit.
- Does not allow for any extra lump sum payment or early repayments to your mortgage.
3. Do I need certainty or flexibility?
Fixing your home loan essentially locks you into a lender for a fixed period of time. If you want to refinance at any time during the fixed term, or you decide to sell your home, your lender may charge you a break fee.
Similarly, accessing the equity in your property – to finance a renovation or pay for a holiday – or making extra home loan repayments could end up costing you in additional fees under a fixed interest rate loan.
On the other hand, if future interest rate increases are going to put pressure on your household budget or your financial situation is going to change – perhaps a new baby or a business venture - then it’s vital you mitigate this risk and fix your interest rate to provide some level of certainty.
4. Can I choose a combination of fixed and variable rates?
One way to approach balancing flexibility with certainty is to split your mortgage. In a rising interest rate environment, split home loans are particularly useful, as they offer borrowers the best of both options.
Combine the flexibility of a variable interest rate that moves up and down with interest rate fluctuations, with the security and certainty of a fixed home loan rate with potential savings over the term of the fixed part of your loan.
5. How long should I fix for and how much?
Getting the right balance of your mortgage on a fixed versus a variable interest rate – and deciding how long to fix your interest rate for - will impact how much your mortgage repayments are, and how much you could potentially save or spend over the life of your home loan. That’s why it’s so important to seek mortgage advice before making any interest rate decisions.
One way to help you get ahead – and make an informed decision about your mortgage rate - is to talk to a Mortgage Express mortgage adviser. Mortgage Express mortgage advisers have experience in helping clients determine how much of their mortgage should be fixed and for how long. Get in touch with a Mortgage Express mortgage adviser today by completing this online form.