How Long Should I Fix For? - What's the Deal?

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Deciding how long to fix or float your home loan comes down to a number of factors. A good financial advisor will ask you a number of questions to truly understand your current financial position and what your desired goals look like. These could include questions like are you holding your property or selling it? How long will you hold it for or when are you thinking of selling? What rate are you on now and when does it mature? What are your short, medium and long term goals? What are your current debt levels, and what is your risk appetite in general? From here, our team can give great advice but the decision is ultimately up to the customer, and none of us have a crystal ball to predict the future exactly.

It’s like the average house price in New Zealand, many are predicting a slight recovery in prices returning to closer to what they were in the peak towards the back end of 2025 (now that we've seen the OCR finally drop by 0.25% in August 2024) but if the last few years have taught us anything it's that everyone from economists to real estate agents to politicians and members of the public have shown they cannot accurately predict what house prices will do. At least with interest rates, we have a bit more control over this, however it’s not an exact science.

Floating Rates:

Lenders of floating-rate loans will lift or lower the interest rate as interest rates in the wider market change. This means your repayments may go up or down.

‍Advantages:

• You can usually lift your repayments or make lump sum repayments without penalty.
• You can use some floating rate based loans as a mortgage overdraft to enable you to save tens of thousands in interest and many years off your loan term.

Disadvantages:

• Floating rates have often been higher than fixed rates.
• When rates go up then repayments also go up, putting a squeeze on your budget.

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Fixed Rates:

Advantages:

• You know exactly how much each repayment will be over the fixed term, which provides security and certainty.
• You can lock in your rates if you think market rates are rising.

Disadvantages:

• Fixed rates often have limits on how much extra you can make lump sum payments without incurring charges. If you decide to break mid fixed term you may be penalised.
• If you fix over a longer term, there is a risk floating rates may drop below your fixed rate.

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It can sometimes be difficult to know which interest rate is best for your situation. Is it better to fix for one year, and fix again next year for another year, or should you just fix for two years today? The best way to figure this out is to think about what the interest rate would need to be next year in order to make fixing for two years today worthwhile.

In the rising interest rate environment we saw mid 2022 - 2024, if you wanted the cheapest possible rate you would probably fix your entire mortgage on the one year rate as this is usually the bank’s lowest headline offer. However, this isn’t necessarily always a great idea. If rates next year were to be significantly higher, you would have to fix your mortgage at a substantially higher rate which would mean a large increase in your payments, which can make budgeting and cash flow a challenge. On the flip side, if you wanted long-term certainty you could choose to put your entire loan on a 5 year fixed rate. This would be great as long as interest rates don’t fall, because if they do you’ll be stuck making much higher repayments than the lower market rate.

In the current climate where we're finally seeing interest rates start to drop (although slowly) we're seeing 1 year rates that are a lot higher than long term ones. This is because the bank expects in a few years time that rates will be lower so they'll make you pay a premium for having the flexibility to fix at what will likely be a lower rate in a year's time. Locking in for a longer term at a lower rate would mean that your payments right now would be lower, but you would need to be ok with paying more than the market rate in a few years' time, which can be a viable option if you would struggle to make payments at the current one year rate and need some relief right now.

As I mentioned earlier, no one has a crystal ball and it’s not possible to see what’s in the future. Here’s where the concept of interest rate averaging comes in, which can be a great way to “hedge your bets.” This concept sees you split your loan into three portions and fix them for different terms (ex. 1 year, 2 year and 3 year, or 5 year). Over time, you’ll get an averaged interest rate and will have the chance to review a substantial portion of your mortgage every year or two, which allows you to assess your situation and also have access to the latest market rates, while still having the security of some of your lending locked in.  It provides you the flexibility and choice to make a decision based on current interest rates and your financial situation.