Every mortgage borrower faces the same decision: Fixed vs Floating? Either fix the interest rate, leave it floating, or split it across both. The implications for your repayments, your flexibility, and your total interest cost over time are more significant than they might first appear. Here’s what each structure actually means.
Fixed Rate Mortgages
A fixed rate locks your interest rate for a set term, typically six months, or one, two, three, or five years in New Zealand. During that period, your rate won’t move regardless of what happens to the Official Cash Rate (OCR) or the broader market. Your repayments stay consistent, which makes budgeting straightforward.
The trade-off is flexibility. If you want to make a large lump sum repayment, sell the property, or refinance during a fixed term, you’ll typically face a break cost. Break costs can be substantial when interest rates have fallen since you fixed, because the lender is compensating for the income they expected over the remaining term.
Fixed rates are generally most appealing when rates are expected to rise, or when the certainty of a known repayment amount carries real value for your household budget.
Floating Rate Mortgages
A floating rate, sometimes called a variable rate, moves with market conditions and typically tracks the OCR. When the OCR rises, floating rates rise. When it falls, they follow. There’s no fixed term and no break cost, so you can make additional repayments, pay the loan down early, or restructure at any point without penalty.
That flexibility comes at a cost, though. Floating rates run higher than comparable fixed rates at most points in time, and your repayment amount can shift as rates move. For borrowers on a tighter budget, that variability can be difficult to plan around.
Splitting Your Loan
Many New Zealand borrowers split their mortgage across fixed and floating portions. For example, you might fix 80 percent of the loan for two years to lock in rate certainty, while keeping 20 percent floating so you can make lump sum repayments without triggering break costs.
The right split depends on your financial situation, your plans for the property, and your view on where rates are heading. Our loan structure calculator can help you model different scenarios, and our borrowing calculator gives you a starting point on overall capacity.
The Role of the OCR
The Reserve Bank of New Zealand sets the OCR approximately seven times per year. Banks use it as a reference point for their own lending rates, though the relationship isn’t one-for-one. When the RBNZ signals a rising cycle, fixed rates often increase in anticipation. When cuts are flagged, fixed rates can fall before the formal announcement.
Timing the market perfectly is difficult in practice. A more useful approach is to ask which structure you’d be comfortable with if conditions moved against you and make your decision from that starting point rather than trying to predict the next move.
If you’re researching suburbs or want suburb-level data to support your property search, order one of our suburb intelligence reports covering locations across New Zealand.
The information in this article is general and educational only; it’s not financial advice. For advice tailored to your situation, we can connect you with a licensed mortgage adviser.
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