Home loans: should I fix, or float my interest rate?

18 February 2015 / Published in Your Money

With home loan interest rates falling at the moment, a hot topic for our customers is whether to fix, float or split their home loan interest rate.  Vince Clark, ASB’s Head of Home Lending, talked through some points to consider if you are making this decision.

There is a lot of talk in the market about whether interest rates will increase or decrease in the long term, and whether you should fix, float or split your home loan interest rate. Predicting where interest rates are going to be at any future point is very difficult! Generally speaking, when interest rates increase, many people tend to choose fixed interest rates to give them certainty over loan repayment amounts.

Fixed rate loans are when the interest rate you pay is locked in for a set period of time (from six months to five years). The benefits of fixed interest loans are that you know how much you will be paying in each instalment and you are protected from interest rate increases during the term of the fixed interest rate.
The downside is that they are less flexible when it comes to making one­-off or extra payments. You may also be charged a break fee if you change, end or wish to repay your home loan.

Floating rate loans are when the interest rate is subject to changes in market conditions, so your loan payments can increase or decrease at any time. Floating interest rate loans give you greater flexibility, allowing you to repay some or your entire loan at any time, without being charged fees.

A split loan is a mix of both fixed and floating home loan interest rates.

If you are weighing up whether to fix, float or split your home loan, here are some points to consider first:

Do I prefer the certainty of knowing what my fortnightly or monthly repayments will be?

One benefit of a fixed rate loan is that you know how much you will be paying at each instalment and you are protected from interest rate increases during the term of the fixed rate. The downside is that they are less flexible when it comes to making one­-off or extra payments and you don't get the benefit if interest rates do come down. 

Am I expecting any extra funds in the near future that I might want to use to repay my home loan?

If your income fluctuates (for example if you earn a commission or bonus), or you anticipate receiving a cash windfall then you may prefer a floating interest rate loan or a shorter fixed term. However it’s worth noting that we do allow additional payments on fixed interest rate loans up to $500 per fortnight or $1,000 per month without penalty, provided that the additional payments are maintained for the rest of the fixed interest rate period.  So don’t rule out fixed interest rate loans altogether if this matches your circumstances.

What can I afford?

Take a look at your budget to see whether you have room to accommodate any interest rate increases. You should consider the impact on other financial commitments or your lifestyle, such as eating out or family holidays.

Will I be selling the property in the near future?

If it is a long-term property investment then you might consider fixing the interest rate for a longer period of time. However, if your plans are to sell in the near future then you might prefer a shorter fixed rate term or a floating rate which offers you more flexibility later on.

If I repay the home loan before the period is up, will I incur any fees?

If your circumstances change and you need to repay the home loan before the end of the fixed interest rate term, you may incur a break fee (often called an Early Repayment Adjustment fee).  It is best to chat with your bank to clarify any fees you may incur when you are deciding how long to fix your home loan.

Can I transfer a fixed rate home loan to a new property if you sell the house and buy another one?

In most cases with an ASB home loan you can but check with us first for any conditions that may be attached to your loan. If your home loan is with another bank, you will need to contact them to discuss your options.

What are my other options?

Splitting your home loan between fixed and floating is another option. This gives you stability for part of the loan to have a fixed interest rate term, so you know how much you are paying at each instalment and some protection from interest rate increases. It then also gives flexibility to make some extra payments on the floating interest rate part if you want. Split loans can strike a balance between certainty and flexibility, and how much you choose to split depends on what is most important to you.

Need some help making your decision? Take a look at our latest home loan rates on our website or call us on 0800 100 600 to chat to an ASB Lending Specialist.

Tell us in the comments - what are you thinking of doing, and why?

This document is published solely for informational purposes.  It has been prepared without taking account of your objectives, financial situation, or needs.  Before acting on the information in this document, you should consider the appropriateness and suitability of the information, having regard to your objectives, financial situation and needs, and, if necessary seek appropriate professional or financial advice. Neither ASB nor any person involved in the preparation of this document accepts any liability for any loss or damage arising out of the use of all or any part of this document.


More articles from ASB