What’s the best interest rate strategy for 2025?
It’s no secret that there’s a lot going on in the market right now, and this downward movement that we are seeing is likely to continue with tariffs having a large effect on the international markets. So with this in mind, many might be wondering what they should do about their interest rates when the time comes to refix or buy… should they fix or should they float?
Let’s take a look at the different kinds of interest rates, the pros and cons for each, and some suggestions depending on the market and your personal situation.
Fixed interest rates
A fixed interest rate is where you choose a fixed period of time and its associated rate from the options available. These options and rates can vary between banks, so it’s best to shop around. This could be a period of time anywhere from 6 months to 5 years. Once this timeframe is up, you rinse and repeat, choosing a new term and rate from those available.
Since the interest rate is fixed you know exactly how much your loan repayments will be over the selected term. This is great in terms of budgeting and gives you the security of knowing exactly what to expect financially.
The downside to a fixed rate is that you will likely need to pay an early repayment fee if you choose to repay your loan sooner, break your loan term early, or want to make extra repayments on your loan. For example, if you got a bonus at work and wished to put this towards your loan, you might find you will have to pay a fee to do so.
Floating interest rates
A floating rate is a current rate that may go up or down depending on market volatility. This means if the rates drop, you will pay less in your repayments but if the rate goes up, your repayments will need to increase too. This needs to be factored into your budgeting throughout the year.
Floating rates are great for those who like to be able to make lump sum repayments on their loan (for example those who earn bonuses, are expecting additional money in the future, or are trying to repay their mortgage quicker). A floating rate allows you to make any extra repayments without any early repayment fees or penalties.
Split rates
This is where you place a majority portion of your loan as a fixed interest rate and a portion as floating. This essentially allows you to have the best of both worlds - some certainty and consistency in your loan repayments AND the ability to make additional repayments on the floating portion without penalty. What split is best for you, will depend on your personal situation, financial goals, and risk tolerance - but don’t worry, we can help you work this out!
So what’s the best interest rate structure for 2025?
It’s a good idea to have a think about what matters to you in a loan. Is it the security of knowing exactly how much your repayments are? Do you want to be able to make additional repayments? Do you plan on staying in your home in the long term or do you plan to move? All of these things can factor into making the best choice for you.
It’s predicted that interest rates will continue to fall throughout the year, and thanks to the tariff wars, it’s expected that the Official Cash Rate will go even lower than what was originally predicted at the start of the year. Keeping this in mind, fixing for the long term right now might not be the best financial choice. Instead, many are looking at either floating options, or for some certainty, fixing for a shorter term (e.g. 6 months) in the hope that the rates will decrease before it is time to refix again.
Of course, nothing is predictable, and things can change at the drop of a hat, so it’s best to do what financially makes sense for you both right now and in the long term. Our team of Christchurch-based mortgage advisers can help you work out what interest rate options might be the best for you. No matter whether you are looking to buy or currently have a loan and are looking to refix, we can discuss your goals and current situation and help you decide what option is in your best interests. Book your free appointment with our team today.