Interest rates: Is now the time to fix or float?
The recent re-emergence of Covid in the community and snap lockdown saw the Reserve Bank decide not to change the official cash rate (OCR).
Commentators had widely anticipated the Reserve Bank would raise the OCR for the first time in several months. ANZ even pre-empted the move and announced a hike to all its fixed mortgage rates.
Given the current uncertainty, the Reserve Bank instead decided to take a cautious approach. However, Governor Adrian Orr made it clear an increase in the OCR is still on the cards. The Monetary Policy Statement sees the OCR increasing from 0.25% to over 1.5% by the end of 2022.
With mortgage rates already increasing, many clients have asked us whether now is the time to fix their home loans. Everyone’s situation is different. So before making a decision, it’s essential to get expert advice from your Loan Market adviser. And to help you prepare for the discussion, we share some general pros and cons of fixed and floating mortgages.
Fixed rate mortgages: Advantages and disadvantages
Fixed rate mortgages have an interest rate fixed for a set term, usually between one and five years. So, whether interest rates skyrocket or fall, you will still be paying the same amount.
The main advantage of fixed rate mortgages is certainty. You know exactly what you need to pay each month. Plus, the rates offered by lenders tend to be more competitive and are usually lower than the floating rate.
The downside is the early repayment charges. Say you get a promotion at work or receive an inheritance and want to pay off your loan faster by making a lump-sum payment. The banks will charge you for the privilege of doing so. You will also be penalised if you break the loan term or decide to sell.
Furthermore, there’s always the possibility that floating rates may fall below your fixed rate. And so, if your mortgage is set for a longer period, you won't be able to take advantage.
Floating rate mortgages: Advantages and disadvantages
Interest rates for these mortgages fluctuate depending on the OCR and tend to be higher than fixed rates.
The main benefit of floating rate mortgages is flexibility. With floating rate mortgages, there are no early repayment charges. You will have a minimum monthly repayment rate but also have the option to pay more without being penalised. And so, if you get a bonus or a pay rise, you can increase the repayments or make a lump sum and pay back the loan faster.
Furthermore, floating rate mortgages don’t have any break clauses or penalties. You are free to sell your home, refinance your loan or switch to another bank with a more attractive rate without worrying about expensive penalties.
Fixed and floating mortgages
It is possible to split your borrowing into a combination of fixed and floating loans, giving you the best of both worlds. With this arrangement, you get the certainty of a fixed rate alongside the flexibility of the floating rate.
Thinking of changing your mortgage? Talk to your Loan Market adviser today. We are still working during lockdown and will help you find the right solution.