One of the most important decisions you'll make when refinancing your mortgage in New Zealand is choosing between fixed and floating interest rates. This choice significantly impacts your monthly payments, your exposure to interest rate changes, and your overall financial flexibility. There's no universally "right" answer—the best option depends on your financial situation, risk tolerance, market conditions, and future plans.
This comprehensive guide will help you understand the fundamental differences between fixed and floating rates, explore the advantages and disadvantages of each, and provide a framework for making the best decision when refinancing your home loan.
A fixed-rate mortgage locks in your interest rate for a specified period, typically ranging from six months to five years in New Zealand. During this fixed term, your interest rate remains constant regardless of what happens in the broader market.
When you choose a fixed rate, you're essentially making an agreement with your lender to pay a predetermined interest rate for a set period. Your principal and interest repayments remain consistent throughout this term, making budgeting straightforward and predictable.
At the end of your fixed term, you have several options. You can refix at current market rates for another term, switch to a floating rate, refinance with a different lender, or pay off your mortgage entirely without penalty.
The primary advantage of fixed rates is certainty and predictability. You know exactly what your mortgage payment will be for the entire fixed period, which makes household budgeting much easier. This stability is particularly valuable for families with tight budgets or those who prefer to eliminate variables from their financial planning.
Fixed rates also provide protection against rising interest rates. If rates increase during your fixed term, you're insulated from these rises and continue paying your locked-in rate. This protection can save you thousands of dollars if rates rise significantly, as they have during various periods in New Zealand's economic history.
Many homeowners find the psychological comfort of fixed rates valuable. Knowing your payments won't increase provides peace of mind and reduces financial stress, even if rates don't ultimately rise as feared. This mental benefit shouldn't be underestimated when considering which option suits your temperament.
The main drawback of fixed rates is their inflexibility. If interest rates fall during your fixed term, you're stuck paying the higher rate you locked in. You can't automatically benefit from market improvements without breaking your fixed-term contract and paying potentially substantial break fees.
Fixed-rate mortgages typically impose restrictions on extra repayments. Most New Zealand banks limit additional payments to around ten to twenty percent of your original loan amount per year. If you receive a windfall or want to pay down your mortgage aggressively, these restrictions can be frustrating and potentially costly in terms of extra interest paid.
Breaking a fixed-rate term early to refinance or sell your property usually incurs break fees. These fees compensate the lender for the interest they expected to earn over the remainder of your fixed term. In falling rate environments, break fees can be substantial—sometimes tens of thousands of dollars—which can make it uneconomical to exit your fixed term even when better rates are available.
Finally, fixed rates are often slightly higher than floating rates when you establish them. Banks charge a premium for the certainty and rate protection they're providing, which means you typically pay more initially for the privilege of rate stability.
Floating rates, also called variable rates, fluctuate with market conditions. Your interest rate can move up or down at any time, typically in response to changes in the Official Cash Rate set by the Reserve Bank of New Zealand or shifts in wholesale funding costs for banks.
With a floating rate mortgage, your interest rate is tied to your lender's floating or variable rate, which they can adjust at their discretion based on market conditions. When the Reserve Bank changes the Official Cash Rate, banks typically pass these changes on to borrowers within a few weeks.
Your mortgage payments can change whenever your lender adjusts their floating rate. You'll receive notice of any rate changes, but these adjustments happen regularly in response to broader economic conditions.
The primary advantage of floating rates is flexibility. You can make unlimited extra repayments without penalty, pay off your entire mortgage at any time without break fees, and easily refinance or switch lenders whenever you find a better deal. This freedom is particularly valuable if you expect to receive irregular income, plan to sell your property soon, or want the option to pay down your mortgage aggressively.
Floating rates may be lower than fixed rates during certain economic periods, particularly when the Reserve Bank has recently cut the Official Cash Rate or when banks are competing aggressively for borrowers. If rates are falling or expected to fall, staying on a floating rate allows you to benefit immediately from these reductions.
The ability to make unlimited extra repayments with floating rates can help you pay off your mortgage significantly faster. If you have surplus income and want to minimize the total interest paid over your loan's life, the flexibility of floating rates supports this strategy effectively.
The most significant disadvantage is uncertainty and risk. Your mortgage payments can increase at any time if rates rise, which can strain your budget and create financial stress. During periods of rapid rate increases, as New Zealand experienced in recent years, floating rate borrowers can see their payments increase substantially within a short period.
This uncertainty makes budgeting more challenging. You need to build a buffer into your budget to accommodate potential rate rises, which requires more financial discipline and larger cash reserves than fixed-rate mortgages.
Floating rates expose you fully to market volatility. While this works in your favor when rates fall, it works against you when rates rise. If you're risk-averse or operate on a tight budget with little room for increased payments, this exposure can be uncomfortable or financially dangerous.
Additionally, floating rates can lead to payment shock if rates rise quickly. Homeowners who became comfortable with low floating rates during periods of low OCR settings have sometimes faced mortgage payment increases of several hundred dollars monthly when rates normalized, creating genuine financial hardship for those unprepared.
Many New Zealand homeowners choose to split their mortgage between fixed and floating portions, attempting to balance the benefits and drawbacks of each approach. This strategy has become increasingly popular as borrowers recognize it provides both stability and flexibility.
You divide your total loan between fixed and floating portions in whatever proportion suits your needs. Common splits include fifty-fifty, seventy percent fixed and thirty percent floating, or eighty percent fixed and twenty percent floating, though any combination is possible.
For example, on a six hundred thousand dollar mortgage, you might fix five hundred thousand dollars on a two-year term at five point eight percent while keeping one hundred thousand dollars floating at six point two percent. This gives you stability on the bulk of your loan while maintaining flexibility on the smaller portion.
Splitting provides partial protection against rate rises while maintaining some flexibility. If rates increase, only your floating portion is affected, limiting your payment increase. If rates fall, your floating portion benefits immediately while you're locked into your fixed rate on the remainder.
You retain the ability to make extra repayments against your floating portion without restriction, allowing you to reduce your mortgage faster if you have surplus income. If you need to break your mortgage to sell or refinance, break fees only apply to the fixed portion, potentially reducing your costs.
This approach also allows you to hedge against your own uncertainty about future rate movements. If you're genuinely unsure whether rates will rise or fall, splitting acknowledges this uncertainty and positions you to benefit partially regardless of which direction rates move.
Some homeowners use laddering strategies with their fixed portions, fixing different amounts for different terms. For instance, you might fix two hundred thousand dollars for one year, two hundred thousand dollars for two years, and one hundred thousand dollars for three years, with one hundred thousand dollars floating. This creates regular opportunities to reassess and adjust your strategy as portions come up for renewal.
Others adjust their split based on rate cycle expectations. When rates are low and expected to rise, they might increase their fixed portion to lock in favorable rates. When rates are high and expected to fall, they might increase their floating portion to benefit from anticipated decreases.
Making the right choice requires careful consideration of multiple factors specific to your situation and the current economic environment.
Your personal comfort with financial uncertainty should heavily influence your decision. If you're risk-averse and value stability above all else, fixed rates provide the certainty you need. If you're comfortable with calculated risks and can absorb payment increases, floating rates offer advantages.
Consider how you'd feel and cope if your mortgage payment increased by two hundred or three hundred dollars monthly. If this possibility causes significant anxiety or would genuinely strain your budget, fixed rates are probably more suitable.
Evaluate your household budget realistically. If you're already stretched thin with little buffer for increased expenses, the predictability of fixed rates is crucial for financial security. If you have comfortable margins in your budget and maintain healthy emergency savings, you're better positioned to handle the variability of floating rates.
Assess where we are in the rate cycle. When the Official Cash Rate is historically low, rates are more likely to rise than fall further, making fixed rates attractive for locking in low rates before increases occur. When the OCR is historically high, rates have more room to fall, potentially making floating rates advantageous.
Review the Reserve Bank of New Zealand's monetary policy statements and economic projections. While not perfect predictions, they provide insight into the likely direction of interest rates over the coming months and years.
Consider the shape of the yield curve—the relationship between short-term and long-term fixed rates. When longer fixed terms carry significantly higher rates than shorter terms, the market is pricing in expected rate increases. When longer terms are only marginally higher or even lower than short terms, the market expects rates to stabilize or fall.
How long do you plan to stay in your property? If you're likely to sell within a year or two, floating rates avoid the risk of break fees. If you're settled long-term, the decision depends more on rate expectations and your risk tolerance.
Do you expect significant income changes? If you anticipate bonuses, inheritance, or other windfalls that you'd like to use for mortgage repayment, floating rates provide the flexibility to make these payments without restriction.
Your LVR affects the rates available to you and may influence your choice. Borrowers with higher equity often qualify for better fixed rates, which can make fixing more attractive. Those with higher LVRs might find floating rates preferable if fixed rates are prohibitively expensive.
If your strategy is to pay off your mortgage as quickly as possible through aggressive extra repayments, floating rates support this approach better than fixed rates with their repayment restrictions. If you prefer consistent, predictable minimum payments without extra repayments, fixed rates align better with this approach.
As you refinance in 2025, several specific market conditions are worth considering in your fixed versus floating decision.
New Zealand has experienced significant interest rate volatility in recent years. The Official Cash Rate rose sharply from historic lows during the pandemic to much higher levels as the Reserve Bank fought inflation. Understanding this context helps frame your expectations about where rates might head next.
After a period of rate increases, many economists expect potential stabilization or modest decreases in 2025, though certainty is impossible. This environment creates different considerations than periods of consistently rising or falling rates.
The New Zealand banking market regularly sees competitive pressure on mortgage rates, with banks offering special rates to attract new customers or retain existing ones. When refinancing, both fixed and floating rates might be negotiable, so don't assume the advertised rates are the best available.
Some banks offer particularly competitive fixed rates for specific terms to attract borrowers, while others might have surprisingly good floating rates. Shop around comprehensively regardless of which rate type you prefer.
Broader economic conditions including inflation trends, employment levels, housing market activity, and global economic factors all influence interest rates. Higher uncertainty might favor the stability of fixed rates, while clearer economic outlooks might make floating rates more comfortable.
Here's a practical approach to deciding between fixed and floating rates when refinancing:
List your priorities in order of importance: payment stability, flexibility, minimizing total interest, ability to make extra repayments, or avoiding break fee risks. Your top priorities should guide your decision.
Calculate what your payments would be under various options: fully fixed at current rates for different terms, fully floating at current rates, or various split arrangements. Then model how these scenarios play out if rates rise by one percent or fall by one percent over the next year.
Based on these models, identify which scenarios you're comfortable with and which would cause financial stress or anxiety. This psychological component is just as important as the mathematical calculations.
Choose the option that best balances your priorities, provides comfort given your risk tolerance, positions you well for the likely rate environment, and supports your broader financial goals.
Remember that you're not locked into one approach forever. As portions of your mortgage come up for renewal, you can reassess and adjust your strategy based on changed circumstances or market conditions.
There's no universally correct answer to the fixed versus floating question when refinancing. The best choice depends entirely on your individual circumstances, financial goals, risk tolerance, and the current economic environment.
Many New Zealand homeowners find that splitting their mortgage provides an effective middle ground, offering both stability and flexibility. Others have clear preferences based on their temperament and situation, with some gravitating strongly toward the predictability of fixed rates while others value the flexibility of floating rates.
What matters most is making an informed decision based on thorough understanding of both options, realistic assessment of your own situation, and clear thinking about your priorities. Working with experienced mortgage advisers can help you navigate these choices and select the approach that best serves your interests.
At Luminate Financial Group, we help homeowners across New Zealand make these important decisions every day. We'll analyze your specific situation, explain your options clearly, and help you choose the rate structure that aligns with your goals and provides the right balance of stability and flexibility for your circumstances.
Need help deciding between fixed and floating rates when refinancing? Contact Luminate Financial Group today for expert guidance. Our mortgage specialists will help you evaluate your options and make the best choice for your financial future.