When considering a mortgage in New Zealand, one of the first decisions you’ll need to make is whether to choose a fixed or variable rate. Both options have their own advantages and potential drawbacks, and the right choice depends on your financial situation, goals, and risk tolerance. At Best Mortgage Brokers, we understand how important this decision is, so we’ve prepared this guide to help you navigate the differences and benefits of fixed vs. variable rate mortgages.

Understanding Fixed Rate Mortgages

A fixed rate mortgage locks in a specific interest rate for a set period, typically ranging from one to five years in New Zealand. This rate remains unchanged throughout the term, providing predictable monthly payments.

Benefits of Fixed Rate Mortgages

1. Stability and Predictability: With a fixed rate mortgage, your interest rate, and therefore your monthly payment, remains constant. This can be beneficial for budgeting, as you’ll know exactly what you’ll be paying each month.
2. Protection Against Rate Increases: If interest rates rise during your fixed term, your rate remains unaffected, saving you money compared to variable rates.
3. Peace of Mind: For homeowners who prefer certainty, a fixed rate mortgage eliminates the stress of potential rate fluctuations. You can rest assured that your rate won’t change until the end of the term.

Drawbacks of Fixed Rate Mortgages

1. Less Flexibility: If interest rates fall, you won’t benefit from the lower rates unless you break the fixed term, which can incur penalties.
2. Break Fees: If you want to exit or refinance your mortgage before the end of the term, you may face break fees, which can be costly.
3. Higher Initial Rates: Fixed rates are often slightly higher than variable rates initially, as they account for the stability they offer over time.

Understanding Variable Rate Mortgages

A variable rate mortgage, also known as a floating rate mortgage in New Zealand, has an interest rate that can change based on market conditions. Your lender will adjust the rate periodically, so your monthly payments could go up or down.

Benefits of Variable Rate Mortgages

1. Potential Savings: If interest rates drop, so will your payments, which can save you money over time.
2. No Break Fees: Variable rate mortgages generally offer more flexibility, allowing you to pay off your loan early or switch to a different lender without incurring high fees.
3. Access to Lower Rates Initially: Variable rates tend to start lower than fixed rates, making them an appealing choice for homeowners who can manage potential fluctuations.

Drawbacks of Variable Rate Mortgages

1. Uncertainty in Payments: Monthly payments can vary, which can make budgeting difficult. If rates increase, so do your monthly costs.
2. Higher Risk: Since your rate isn’t locked in, there’s a risk of unexpected rate hikes, leading to higher payments.
3. Market Dependency: Variable rates are tied to the market and economic conditions. If the Reserve Bank of New Zealand (RBNZ) raises interest rates, you’ll likely see an increase in your mortgage rate as well.

Key Differences: Fixed vs. Variable Rate Mortgages

Which Mortgage Type Is Right for You?

The right mortgage choice depends on your financial goals, lifestyle, and risk tolerance. Consider the following questions to guide your decision:

1. Do you prefer predictable payments?
   • If you value the stability of knowing your monthly expenses, a fixed rate mortgage might be the better option for you.
2. Can you handle potential fluctuations?
   • If you have some flexibility in your budget and can manage the risk of rate increases, a variable rate mortgage could offer long-term savings.
3. How long do you plan to stay in the property?
   • For those looking to stay long-term, a fixed rate mortgage might offer peace of mind. On the other hand, if you’re planning to move or refinance soon, a variable rate mortgage may provide flexibility.
4. What are the current market conditions?
   • In a rising rate environment, locking in a fixed rate might protect you from increases. Conversely, if rates are stable or expected to decrease, a variable rate could yield lower costs.

Fixed vs. Variable: A Hybrid Approach

In New Zealand, many homeowners opt for a split mortgage, combining both fixed and variable rates. This option offers the best of both worlds: the stability of a fixed rate and the potential savings of a variable rate. By splitting your mortgage, you can enjoy partial protection against rate hikes while still benefiting if rates decrease.

Factors to Consider with New Zealand’s Mortgage Market

The New Zealand mortgage market is influenced by factors such as the RBNZ’s official cash rate, inflation, and the broader economy. Recently, the RBNZ has increased interest rates to control inflation, which may make a fixed rate appealing to those looking for security against future hikes. However, if you believe rates may stabilise or fall, a variable rate could be a cost-saving option in the near future.

Tips for Choosing the Right Mortgage

1. Consult with a Mortgage Broker: Working with a mortgage broker, such as Best Mortgage Brokers, can help you assess the current market, compare lenders, and understand the options available.
2. Evaluate Your Financial Situation: Consider your income, savings, and financial goals when deciding between a fixed or variable rate.
3. Research Potential Lenders: Each lender offers different fixed and variable rates. Finding the best lender can save you money over the life of your mortgage.
4. Stay Informed on Rate Trends: By staying updated on New Zealand’s mortgage trends, you’ll have a better understanding of when to lock in a fixed rate or stay variable.

Conclusion

Choosing between a fixed and variable rate mortgage is one of the biggest decisions you’ll make when financing a home in New Zealand. Fixed rates offer stability and peace of mind, while variable rates can provide flexibility and potential savings. If you’re unsure which path is best for you, a split mortgage might offer a balanced solution.

At Best Mortgage Brokers, we’re here to help you make the right choice. With our expertise in New Zealand’s mortgage landscape, we can guide you through the options and find the perfect mortgage for your unique needs. Whether you’re a first-time buyer or a seasoned homeowner, our team is committed to helping you achieve your financial goals.