Deciding whether to fix, float or use a combination of mortgage strategies is a tough decision to make, especially in a fluctuating interest rate environment. But ultimately, it will depend on your financial situation and where you see interest rates landing over the next few years. While there are some advantages to each of these mortgage strategies, there are disadvantages too. Here are some things to consider when choosing a mortgage strategy that’s right for you.

Should you fix, float or do both?

Choosing the right mortgage strategy is tricky at any time, but when interest rates are pegged to rise, and we’re seeing movement on an almost daily basis, it does make things a lot more challenging.

The long-term outlook for New Zealand’s interest rates is largely an unknown factor, but with inflation at its highest level in 30 years, the Reserve Bank of New Zealand (RBNZ) will almost certainly be looking to drive interest rates higher in a bid to dampen spending.

Tasked with maintaining a 1 to 3 per cent inflationary target, the pressure will be on the RBNZ after figures released in July 2022 show inflation is at a staggering 7.3 per cent!

Having recently raised the official cash rate (OCR) by 50 basis points – the third time this year – to 2.5 per cent in July 2022, current forecasts project that the RBNZ will likely increase the OCR to 4 per cent by the middle of 2023.

Knowing what’s right for you

For each type of home loan – whether it’s a fixed term interest rate mortgage, a variable interest rate mortgage, or a mortgage split across both fixed term and variable interest rates – there are some benefits and disadvantages.

Fixed term interest rate mortgage:

The benefits of a fixed term interest rate mortgage is that borrowers will have certainty for a fixed period of time, knowing what their repayments will be during what is likely to be a fairly volatile time of interest rate movements over the next few years.  

The disadvantage of course is if interest rates track down – or the borrower experiences a change of circumstances – being locked into a fixed term interest rate mortgage could mean missing out on lower interest rates and having less flexibility to change repayment amounts.

Variable interest rate mortgage:

While interest rates are tracking upwards, being on a variable interest rate isn’t always ideal. Each time the interest rate moves upward, the borrower’s repayments go up too. Conversely, when interest rates drop, those on a variable interest rate mortgage benefit from lower repayments.

With this type of home loan, there is slightly more flexibility in that borrowers can make extra repayments from time to time, dependent on their lender’s conditions, which means it may be possible to get mortgage-free sooner.

Split mortgage:

With so much volatility in the market right now, borrowers don’t need to have their entire mortgage on the same fixed or variable interest rate. Splitting the mortgage over several fixed terms, with some left on a variable interest rate, allows borrowers to spread the risk, essentially getting the best of both options.

By splitting the mortgage over both fixed term and variable interest rates, borrowers have some certainty knowing how much part of their repayments will be for a set period of time, while also having some flexibility to make extra repayments with the variable part of their loan. 

What should you be thinking about?

When it comes to deciding on the right mortgage strategy, there are a few things worth thinking about: 

• What are your goals for the next five years?
• Will you be selling your existing home?
• Do you need to downsize or find a bigger place?
• Are you planning to travel or start a family?
• Are you thinking about renovating your home?
• Do you expect a change in income?
• A promotion, career change or retirement?
• How much flex do you have in your budget?
• Is there room for movement on repayments?
• Do you want the flexibility to make extra repayments?
• Do you need certainty with fixed mortgage repayments? 

These are important considerations that need to be answered before a decision can be made. Working with a mortgage adviser may help you determine the right type of home loan structure to fit your circumstances. If you’re not sure about the right mortgage – or how it should be structured to maximise your financial position – contact a Mortgage Express branded mortgage adviser today.

The team of mortgage experts at Mortgage Express are experienced at helping clients in the current economic climate, and can help you decide on the right home loan structure and type of mortgage to best fit your unique situation.