In New Zealand, there are three primary ways interest is calculated and charged to your loan accounts:
- Floating Interest Rates
- Fixed Interest Rates
- A mix of Floating and Fixed Interest Rates
Floating Interest Rates
This is when the amount of interest on the initial sum fluctuates, in accordance with changes in the “Official Cash Rate” released by the government.
You may have noticed recently that interest rates have dropped – its been all over the news. While this means the mortgage market is affordable at the moment, this could change in the near future- and cost you big time.
Floating Interest Rates suits
- people with a variable income, who can then change repayments when they receive a bonus or a cash windfall, and
- people with other forms of high interest debt – using a floating mortgage to combine loans, then repay using the one floating mortgage.
FIXED Interest Rates
The amount of interest you pay is fixed for a determined period of time – between a few months to 5 years. And at the end of this period if the loan isn’t yet paid off, a new interest rate and term of repayment is negotiated or it reverts to the floating rate.
People on a fixed income, who will not be able to pay extra lump sums. Fixed rate mortgages give security, so you know what repayments you’ll have and can budget for them – no nasty surprises!
In the current market: Fixed interest rate mortgages are traditionally less common in New Zealand, but recent drops in interest rates have meant that they are becoming more attractive to borrowers.
People are locking in at today’s lower rates, as it’s possible they may rise in the future. However, it is possible they’ll continue to drop, and “locking in” at the wrong time may mean you pay more than you need to.
A Mix of Fixed and Floating
The debt is split into 2 portions, this allows a balance between the “bankability” of a fixed mortgage and allows you to take pay back lump sums on the floating portion of the mortgage.
These is frequently the most common option chosen by customers and a smart way of hedging against possible interest rate fluctuations.