Fix, float or both: Expert tips for borrowers wanting to take advantage of cheap mortgage rates

A leading economist says he doesn't expect large falls in interest rates - but short-term fixed rates could get slightly cheaper.
A leading economist says he doesn't expect large falls in interest rates - but short-term fixed rates could get slightly cheaper. Photo credit: Getty.

Interest rates could fall further yet, leaving many borrowers wondering whether it's a good time to lock in a fixed interest rate or wait for an even better deal.

The official cash rate (currently 0.25 percent), is next reviewed on February 24. Mortgage rates are set at a margin above the OCR, but are already at record lows. The recent fall in unemployment (4.9 percent in the December quarter) and rising inflation expectations (1.89 percent for the March quarter), point to a stronger economic outlook, meaning interest rates are unlikely to drop by much, Infometrics senior economist Brad Olsen says.

But banks recently cut one-year fixed rates - and there is room for them to go a bit lower still.

"We can't see the floating rate moving around a lot, but could see short-term fixed rates edge lower as cheaper funding for lending loans replace more expensive previous loan facilities at retail banks," Olsen says.

"We're not forecasting interest rates moving all the much higher in the next few years, but there is mounting caution over how quickly interest rates might start to rise."

To help new borrowers and homeowners with expiring fixed-rate mortgages make a decision, Newshub spoke to mortgage adviser Kris Pedersen about the different rate options.

1. What's the difference between floating and fixed mortgage rates?

A floating mortgage rate goes up and down. A fixed mortgage rate stays the same for a specified term (e.g. six months to seven years).

2. Floating mortgage rate advantages and disadvantages

Floating mortgage rates are flexible.

Borrowers can pay off as much as they like. They can change the structure of their mortgage without paying a charge ('break fee'). If fixed interest rates fall, they have the opportunity to lock in a rate at that time. But in the meantime, floating rates generally cost more.

"The positive [of] a floating rate is really the flexibility it provides… a borrower is able to repay as much as they want at any stage.

"The negative is that the rate is generally higher than what you will be paying on a fixed rate," Pedersen says.

For example, a homeowner with a $400,000 mortgage on a floating rate of 4.45 percent would pay $2015 per month. On a fixed rate of 2.20 percent, they'd pay $1519 per month.

"This equates to a difference of $5952 across the year."

3. Fixed mortgage rate advantages and disadvantages

Fixed mortgage rates are locked in for a specified period (borrowers can choose between six months to seven years). Fixed rates are generally cheaper - and give borrowers certainty.

"Fixed rates - in particular short-term fixed rates - are the cheapest in the market and there's the ability to lock in the same rate in the market for up to seven years," Pedersen says.

"The negative is the lack of flexibility in that if you come into a sum of money, you may be penalised if you want to use it to reduce your fixed-rate loan (although many banks do allow some additional payments at no charge)."

4. Why consider a five-year fixed mortgage rate?

Five years can seem like a long time. Interest rates could still be low - or they could go up.

But living on a tight budget, not expecting income to change and not intending to sell the house could be all valid reasons for choosing a five-year fixed interest rate.

"Some banks have been offering a one-year at 2.29 percent and five years at 2.99 percent… it's up to the borrower if they want to pay the additional margin to guarantee the certainty the additional time provides," Pedersen says.

5. Why consider a one or two-year fixed mortgage rate?

First home buyers who borrow to maximum capacity, or borrowers whose income is currently limited but who expect it to go up in the near future could consider choosing a shorter fixed-term rate, e.g. a one or two-year fixed rate.

This option may also suit joint borrowers, where one is on maternity or paternity leave.

"By taking a cheap, short-term rate it relieves pressure on the household who are better positioned to afford a higher rate when they're back to dual incomes," Pedersen says.

6. Can I choose a combination of fixed and floating rates?

People who want the certainty of a fixed rate of interest and the ability to pay more money off their mortgage could look at splitting their mortgage into two or more parts.

This would involve assigning part or most of the mortgage to one or more fixed interest rates, and leaving part on a floating rate.

"This can be beneficial for [people] who have a performance element to their income, such as commission or bonuses so they can alter what they pay to the floating portion accordingly," Pedersen says.

Most banks also offer revolving credit and offset mortgage facilities. Revolving credit works like an overdraft, allowing borrowers to pay more off and draw down funds, up to a certain limit.

Offset mortgages link savings in other bank accounts to the mortgage, enabling borrowers to cut down daily interest charges.

7. What are the most competitive fixed interest rates right now?

Here's a selection of fixed and floating and fixed interest rates offered by the top five New Zealand banks on Wednesday.

The cheapest fixed rate is currently the one-year rate of 2.29 percent, available through ASB, BNZ, ANZ and Westpac. The cheapest variable rate is 3.40 percent, offered by Kiwibank.


  • Fixed: 6 months 3.39 percent, 1 year 2.29 percent, 2 years 2.59 percent, 5 years 2.99 percent
  • Variable (floating): 4.45 percent.

BNZ (owner-occupied rates): 

  • Fixed (classic): 6 months 3.39 percent, 1 year 2.29 percent, 2 years 2.59 percent, 5 years: 2.99 percent.
  • Variable (Total Money offset): 4.55 percent.

Kiwibank (minimum 20 percent equity):

  • Fixed: 6 months 3.55 percent, 1 year 2.35 percent, 2 years 2.65 percent, 5 years: 3.19 percent.
  • Variable (floating) including offset: 3.40 percent, Revolving credit: 3.45 percent.

(For borrowers with less than 20 percent equity, separate rates apply).

ANZ (minimum 20 percent equity):

  • Fixed: 6 months 3.39 percent, 1 year 2.29 percent, 2 years 2.69 percent, 5 years: 3.99 percent.
  • Variable (floating): 4.44 percent, revolving credit: 4.55 percent.

Westpac (minimum 20 percent equity):

  • Fixed: 6 months: 4.15 percent, 1 year 2.29 percent (special, owner-occupiers only), 2 years 2.69 percent, 5 years: 2.99 percent.
  • Variable (floating including offset): 4.59 percent.

Homeowners with mortgages about to roll off fixed interest rates are encouraged to talk to their bank - or mortgage broker - to negotiate a new rate.

"Often banks will have a couple of key rates they are marketing which they won't tend to improve much on however it is worth pushing and looking at what other banks are doing and negotiating off the back of that," Pedersen adds.

As personal circumstances are different, borrowers are encouraged to talk to their bank or mortgage broker before making a decision.