Finding Your Ideal Home Loan: Fixed vs. Floating

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.

{Source: http://www.canstar.co.nz/home-loans/should-you-fix-or-float-your-home-loan/}

A fixed or a floating rate home loan, which is better?

Shilpa Sharma, 44, is a mother of two and works with an IT firm. She earns a modest income and has been living with her parents since her husband died three years ago. Sharma feels it is time she bought her own house. She has approached lenders to inquire about home loans and is caught between choosing a fixed rate and a floating rate loan. Which one should she opt for?

It is important for Sharma to bear in mind that predicting the future interest rate is tougher than deciding the EMI she can pay. A fixed rate home loan, in which the interest rate is pre-fixed for the tenure of the loan, provides a known cash outflow for a known period. The risk for Sharma is that she might lock in at a high rate for a long period in the future.

In a floating rate home loan, the interest rate changes as per the market rates over the tenure of the loan. Sharma will be affected by the change in the reference rate of interest indicated by the bank, which, in turn, is linked to market rates of interest. Lenders typically adjust the tenure of the loan and keep the EMI constant in floating rate loans.

If interest rates were to fall in the future, Sharma will benefit from a reduction in her repayment tenure. If the rates move up instead, her repayment tenure can increase. In both the cases, Sharma should focus on the monthly installment and make sure that she is able to pay the EMI comfortably and is left with enough money to meet her other needs.

Which home loan is best fixed or floating, the bank bears the risk of the rates going up in the future, while in a floating rate loan, Sharma bears this risk. Except in a fortunate situation, where Sharma is able to lock in at a very low fixed rate, a floating rate loan is a better option as it does not try to guess the future rates.

Sharma should understand that her bank may have a better view of interest rates than her. A good clue may lie in the pricing. Fixed rate loans may be priced higher than floating rate loans if the bank believes that the rates will rise. It helps the banks to earn more as rates increase through the floating rate option.

If the fixed rate is priced lower than the floating rate, the bank is anticipating a fall in interest rates. It helps the bank to lock in at a higher fixed rate. It is also important to find out whether the fixed rate home loan is for the entire tenure or partial term of the loan since most lenders offer a loan that is fixed for the initial two to five years, after which it is converted into a floating one.

{Source: https://mangalamassociates.blogspot.in/2014/11/a-fixed-or-floating-rate-home-loan.html}