Fixed vs. Floating - Which is better for a first home buyer?
After a period of high interest rates, borrowers and borrowers-to-be can now breathe a collective sigh of relief as interest rates continue to fall. But with so many changes going on in the market right now, what is the best interest rate strategy for those looking to buy a home?
First up, let’s look at the options…
Fixed interest rates
When you choose a fixed interest rate, you have the option to select a fixed term and its associated rate from the available options. This term can range from 6 months to several years. Once the term ends, you can choose a new rate and term, and the process begins again.
The great thing about fixed interest rates is that you know exactly what your repayments will be as the interest rate will not change in that period. In a falling market, the trick is when to fix, for how long, and at what point to remain on a floating rate for a little longer depending on the OCR reviews and global markets - but this is all stuff we can help you with!
When you lock in a fixed rate, you may be subject to an early repayment fee if you choose to make a larger repayment, a lump sum payment during the fixed term, or end your fixed term early (e.g. refinancing or switching to a floating rate).
Floating interest rates
When you choose a floating interest rate, you are agreeing to opt for a rate that may go up or down depending on the market. Some types of loans are available as floating rates only; however, with most loans, you can move to a fixed rate at any time.
It’s important to understand that your repayments can change depending on the floating rate at the time. Should interest rates drop, awesome - you will pay less (or get ahead on your loan by keeping your repayments the same). But should they go up, then your repayments will need to increase too, so it’s essential to factor this into your budget.
One main benefit of floating interest rates is that you can make lump sum repayments without early repayment penalties. This is great for borrowers who earn bonuses or often have extra amounts of money and want to repay their loan quicker.
What’s best for first home buyers?
What’s best for you depends hugely on your circumstances and preferences.
- Do you prefer the security of set repayments, or are you happy for them to go up and down?
- Do you want the option to be able to pay larger chunks off your mortgage?
- Do you want to refinance any time soon?
- Do you plan on moving in the future (therefore needing to change your loan)
What we often recommend for many buyers is a split interest rate. This is where you secure a portion of your mortgage on a fixed interest rate and leave the rest on a floating interest rate. This offers flexibility and allows you to make additional repayments to the floating part of the loan without penalty, but it also gives you some certainty and stability over a good portion of your loan.
2025 predictions
It’s predicted that rates will continue to drop throughout 2025, with the OCR expected to fall 0.75% over the remainder of the year. However, this isn’t guaranteed, and as we all know, things can change just like that. With that in mind, some might choose to fix their mortgage for a shorter amount of time (e.g. 6 months) in the hope that rates decrease in this time, before locking into a longer fixed term towards the end of the year. Others may prefer the certainty now, so they may choose to lock in for a longer term.
If you are uncertain about what interest rate strategy would work best for you in 2025, get in touch with our Queenstown-based mortgage advisers. Even if you’ve never worked with us before, we can take a look at your current mortgage setup and discuss your goals and current financial situation and help you make the most beneficial choice for you. Book your free appointment with us today.