With the
official cash rate having decreased five times over the past 12 months (with
the most recent 25 basis point move being in March 2016) many mortgage-holders
are no doubt weighing up their fixed versus floating home loan options.
First up, we
should say that the decision to choose between a floating or fixed interest
rate loans when borrowing should be made according to your own individual
situation and not necessarily just because that’s what everyone else is doing!
We can, however, give you a few pros and cons to think about when you’re making
your decision about home loan types.
What do you need to weigh up with
fixed/floating home loans?
You need to
weigh up whether you want to take advantage of rate fluctuations by floating
your mortgage, or whether you need certainty of monthly repayments. Fixing your
home loan rate means you know exactly what you have to pay every month and
there are no nasty surprises if rates go up in the meantime. This gives peace
of mind to those on a fixed income who may have some difficulty stumping up
extra cash at the whim of their lender.
Floating, on
the other hand, allows you to play the market more. If rates go down, so do
your repayments. However, the opposite is also true. Here are some pros and
cons of each – and you can compare home loans here.
Fixed home loans might suit a tight
budget
Which home
loan is best fixed or floating are certainly popular in New Zealand, with approximately 78%
of visitors to CANSTAR’s home loan selector tables searching for a fixed-rate
loan. This is not surprising, with current average fixed-rate loans on
CANSTAR’s database cheaper across all loan terms than the average floating
rate.
Possible benefits of a fixed-rate
home loan
·
You
know exactly what your repayments are until the end of the fixed term, which
can be useful for those on a tight budget.
·
Currently,
as mentioned, the average fixed rate home loan interest rates are lower than
the average floating rate home loan interest rate.
·
If
you are on a fixed rate home loan contract and the official cash rate rises,
your repayments will stay the same.
Possible disadvantages of a
fixed-rate home loan
·
If
the RBNZ decides to cut the official cash rate –and if banks follow suit by
cutting the interest rate of home loan products, you won’t get the immediate
benefit of it.
·
Break
fees on fixed-rate home loans can be hefty if you sell or want to get out of
the loan before the fixed term is up.
·
When
the fixed term is up you may have to revert to a higher rate in accordance with
rate movements at the time – make sure you factor this into your budget
Floating: a home loan for playing the
market
Which home
loan is best fixed or floating, plenty of people still float their home loan
rate.
Possible benefits of a floating rate
home loan
·
Sticking
to a floating rate home loan gives you the ability to capitalize on any
downward rate movements.
·
If
rates go down so do your repayments, allowing you to pay more into your loan.
There is a lot of money to be saved over the long term by keeping your
repayments at the same level even as interest rates head down!
·
It’s
flexible: if you want to refinance, move house or exit your home loan contract
for any other reason, you can!
Possible disadvantages of a floating
rate home loan
·
If
rates go up you have to find money for higher repayments. This might be
challenging if you are on a tight budget.
·
If
the official cash rate starts increasing rapidly, you may find that it’s too
late to lock in a favorable fixed home loan rate.
But, when it
really comes down to it, choosing a home loan is about finding the right fit
for you. After all, that knitted jumper might look absolutely smashing on your
Nana but a frightful fashion crime when you try it on for size.
A home loan
is a long-term prospect, so take the time to compare home loan rates, look at
your own finance and budgeting style and talk to any significant others if they
are involved in the process.
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