Compare Floating Rate Mortgages

What is a floating rate home loan?

To fix or to float? It’s one of the most important decisions you’ll be faced with when choosing a home loan. We look at the pros and cons of a floating mortgage and why it could be a good option if your goal is to pay off your mortgage early.

Essentially, a floating rate (or variable rate) home loan doesn’t have a fixed interest rate. Instead, the interest rate can fluctuate depending on factors like the official cash rate set by the Reserve Bank of New Zealand (RBNZ) and market demand, rather than locking in the same interest rate for the fixed term.

This means your repayments on an adjustable-rate mortgage will move up or down to match the changing interest rates of NZ; some months, your minimum payment will be more and some months, less.

Let’s say you’ve chosen a flexible mortgage with a monthly repayment frequency.  Your first few repayments are $1,500, but after a few months, interest rates in NZ increase and your monthly payment goes up to $1,560. Then, the interest rate drops and your repayments decrease to $1,480.

Your lender will notify you of any changes in the interest rates. Lower monthly payments are a pretty significant bonus, however, you need to be prepared for the possibility of your payments increasing.

Can you pay your home off faster with a flexible mortgage?

Yes. If you want to pay your home loan off quicker, adjustable rate mortgages are more flexible when it comes to extra repayments than a fixed rate mortgage.

Lenders for floating mortgages will generally allow you to make extra repayments when you can, which can help you meet your goal of being mortgage-free faster, without penalty.

Pros and cons of a floating mortgage

Like any loan, a flexible mortgage has advantages and disadvantages.

Pros:

• The interest rate can decrease and lower your monthly interest payments, and you’ll enjoy some extra money in your pocket.
• An adjustable-rate mortgage is more flexible than fixed-rate home loans; you can make extra repayments which reduce the overall interest cost of the loan.
• Generally, no break fees apply if you decide to sell your home or switch loans.

Cons:

• The initial interest rate can increase, which means a higher monthly repayment and a squeeze on your budget.
• Budgeting can be a challenge. When interest rates in NZ can be unpredictable, your loan repayments can change from month to month.
• Floating rates in a flexible mortgage may increase and become higher than you could have locked in a fixed rate for.
• It may not suit borrowers who prefer stability and predictability.

Hedging your bets – Fixed and Floating

Another option is to choose to put part of your mortgage on a floating rate and part on a fixed rate, this is called a split loan.

A fixed/floating split like this allows you to pay down the floating amount without being penalised with early repayment fees, but still have consistency through the fixed rate.

Whether a floating rate mortgage is right for you depends on your specific needs and goals and your income.

A financial adviser can help with this if you do not feel confident working through the pros and cons