A fixed rate mortgage has an interest rate that doesn’t change over an agreed period of time – six months, or one, two, three, four or five years. Fixed rates are typically lower than a floating rate.
Also known as a ‘fixed mortgage’ or ‘fixed home loan’, this type of mortgage is popular with New Zealand home owners. The main attractions are predictable regular repayments and lower interest rates. But before you sign up for a fixed rate home loan, it’s important to know exactly what you’re getting into. So here’s an overview of the main features, pros and cons to get you started.
What are the main features of a fixed mortgage?
As its name suggests, a fixed rate mortgage has an interest rate that doesn’t change over the agreed interest rate period (term). The available periods typically range from six months to five years. You can compare most of the lenders’ current fixed interest rates on our handy table of mortgage rates.
What are fixed interest rate agreements?
Choosing a fixed interest rate is like signing a contract with your lender. You agree to keep making the specified regular repayments until the fixed interest rate period ends. They agree to keep the interest rate the same for that period.
What happens when a fixed interest rate period ends?
Can you make extra repayments while on a fixed rate mortgage?
What happens if you break a fixed interest rate agreement?
Why do lenders charge an early repayment penalty fee?
It’s simply to recover the amount they’ll lose if you break the fixed rate agreement. Typically, they borrowed the money at a fixed wholesale rate for the agreed period and may not be able to re-lend it for the remaining time at the same rate, particularly if interest rates have fallen.
How much is an early repayment fee?
This will depend on how much extra you repay, how much you still owe, how long the fixed rate period has to run and current market interest rates. All of those factors tie back to the day you break. If you’re thinking of repaying some or all of a mortgage while it’s on a fixed interest rate, be sure to ask your lender what the penalty fee would be. They’ll only be able to give you an accurate amount for breaking on the day you enquire, but it’ll give you a good idea of how much to factor in.
What’s the difference between fixed and floating mortgages?
While a fixed mortgage interest rate doesn’t change, a floating interest rate can increase or decrease at any time. That means your regular repayments for a floating mortgage can also change.
Here are some other ways that floating mortgages are different to fixed ones:
Mortgage repayment flexibility
With a floating mortgage, you can make lump sum repayments at any time. Most lenders will also let you increase your regular payments to pay off your loan faster or decrease them to take pressure off your budget. However, decreases can only go down to a level that would still see you repay your entire mortgage within its original term, for example 25 years.
Freedom to switch lenders
Choice of mortgage type
Some types of home loans, such as offsetting mortgages and revolving credit mortgages, are only available with floating interest rates.
What are the advantages of a fixed rate mortgage?
Here’s a quick summary of why so many Kiwis choose a fixed interest rate:
Easier budgeting and less stress
A fixed rate mortgage offers the certainty of a consistent interest rate and predictable regular repayments for the agreed fixed rate period. This can make it much easier to budget, particularly at the beginning of a mortgage when things can be tight. It can also remove the stress of constantly worrying about interest rates rising (at least for the fixed interest rate period anyway).
Typically lower rates
What are the disadvantages of a fixed rate mortgage?
If interest rates fall, yours won’t
Limited ability to make extra repayments
Difficult to switch lenders
Can you have more than one type of mortgage?
Why choose more than one fixed interest rate?
Why put some of your mortgage on a floating rate?
People often do this to retain some ability to make extra repayments. For example, if you’re expecting your income to increase, you have an irregular or seasonal income, or you expect a windfall, you might put a corresponding amount on a floating rate and fix the rest. That can give you the best of both worlds – a good bit of certainty and lower fixed interest rate, plus the ability to repay your mortgage faster.
This strategy may also suit if you’re expecting a future drop in income from something like having a child or taking time off work to go travelling. It lets you repay a good chunk of your mortgage as fast as you can, then settle into the certainty of the remaining fixed mortgage.
Why combine a fixed mortgage with an offsetting mortgage?
This can be a very powerful strategy. In short, an offsetting mortgage lets you use the money in an everyday account to effectively reduce the balance of an offsetting mortgage. That means you pay interest on a smaller daily balance and repay your mortgage faster.
The trick is to have your income paid into the offsetting account to immediately reduce the effective loan balance. You then put most of your expenses on a credit card and automatically repay it in full at the end of each interest-free period. This keeps your offsetting account balance up and your effective mortgage balance down, for as long as possible.
An offsetting mortgage has a floating interest rate, which is usually higher than a fixed one. However, if you get the fixed vs floating split about right, your effective balance in the floating part will be very small for most of the time.
How to choose the best types of mortgage for you?
There are three main steps to this. One is being clear about your goals and appetite for risk. Another is setting a realistic budget and sticking to it. The third is to get trusted independent advice, from someone like an accountant or lawyer or mortgage broker.
Mortgage brokers are paid by the lender you choose from their recommendations, so there’s normally no extra cost for you. To help you find a good mortgage broker, we have a free Find a Broker service. It connects you with a qualified and experienced mortgage adviser from our hand-picked panel.
To learn more
Our helpful guides make it easy to find out more. Here are a few examples:
