The most costly purchase a person will ever make is often a piece of real estate. It’s likely that you don’t have $1 million lying in the bank collecting dust given the cost of a Kiwi home today. So, you’ll need to seek the bank for a loan so you may purchase your first house or your next investment property. You must apply for a mortgage. The cost of the bank lending you the money is the interest rate, which is attached to every mortgage. Once you have a mortgage, interest rates will become a serious fixation for you. Describe them. What are they doing? Can I forecast what the rates will be in three years? Which bank has the most competitive interest rates? Please keep in mind that interest rates are subject to frequent adjustment. As a result, in six months, the interest rates quoted today might be outdated.
A Fixed Rate: What Is It?
With a fixed-rate loan, an agreed-upon interest rate is “locked in” for a predetermined time. Although most banks only go for five years, this is frequently between six months and seven years. Consider having a $500,000 mortgage that you are paying down over the course of 30 years. You choose to lock your mortgage rate for a year at 5%. For the following 12 months, you must pay $619 every week as payback.
The amount you pay stays the same for the whole year, regardless of changes in the interest rates the bank gives to new clients. Therefore, setting your interest rate gives both you and the bank some financial security because you will know precisely how much you will have to pay in loan repayments throughout that time.
You will then have the choice of refinancing your mortgage at the current interest rates or switching to a variable rate at the end of that year. Depending on how long you want to fix for and, of course, whose bank you are speaking to, you might obtain different interest rates.
For instance, at the time of writing, BNZ was providing fixed rates of 4.95% for a one-year term, 5.39% for a two-year period, and 5.99% for a five-year term. The disadvantage of setting your interest rates is that you could have to pay early repayment costs if you pay off your mortgage early (for example, if you sell your home).
A Floating Rate: What Is It?
A floating rate, as the name indicates, allows for rate fluctuations during the life of the loan in accordance with the market’s normal ups and downs. Your mortgage payments will thus fluctuate week to week as a result. You thus lack the same assurance of a constant payback amount. The drawback of this is that the repayment you must make this month could not be the same as the repayment you must make the next month. Most New Zealanders dislike uncertainty, which is provided by this. Additionally, floating interest rates frequently exceed fixed interest rates.
However, there are more options for paying off your loan quickly, so if you pay off your debt quickly, you might save a lot of money.
You won’t incur early repayment costs if you sell your home and pay off your mortgage.
Which Should I Use, then? Floating Or Fixed?
Most financial consultants will advise combining the two. Many borrowers fix a sizable chunk of their mortgage so they are aware of their weekly or monthly payments in advance. However, they could also leave some of the mortgage (like 5–10%) floating. This indicates that you are free to increase your mortgage payment without incurring early repayment penalties.
BNZ has the cheapest 1 and 2-year rates, but ASB has the cheapest 5-year rate.
