Fixed Rate Mortgage vs Floating Rate Mortgage
A fixed rate locks your interest rate for a set period (typically 1-5 years in NZ), giving you payment certainty. A floating rate moves with the market and is directly influenced by the OCR. Many NZ borrowers split their lending across both to balance certainty with flexibility.
Side-by-Side Comparison
| Attribute | Fixed Rate Mortgage | Floating Rate Mortgage |
|---|---|---|
| Interest rate | Locked for the fixed term (1-5 years common in NZ) | Variable — changes when your bank adjusts its floating rate |
| Payment certainty | Repayments stay the same for the entire fixed term | Repayments can increase or decrease at any time |
| OCR influence | Indirect — fixed rates price in expected future OCR movements | Direct — floating rates typically move within weeks of OCR changes |
| Break fees | Yes — can be significant if you break the fixed term early | No break fees — fully flexible |
| Extra repayments | Limited — most banks allow 5% extra per year without penalty | Unlimited extra repayments at any time |
| Typical rate comparison | Usually lower than floating for the same period | Usually 0.5-1.5% higher than equivalent fixed rates |
| Best when rates are | Expected to rise — lock in the lower rate | Expected to fall — benefit from rate decreases |
| Common NZ strategy | Fix portions on different terms (1, 2, 3 years) | Keep a floating portion for flexibility alongside fixed portions |
Fixed Rate Mortgage Explained
A fixed rate mortgage locks your interest rate for a specified period. In New Zealand, the most common fixed terms are 1, 2, 3, and 5 years — shorter than many other countries where 25-30 year fixed rates are available. When your fixed term expires, you choose a new rate (fixed or floating) at the prevailing market rates.
The main advantage is payment certainty. You know exactly what your repayments will be for the fixed term, making budgeting straightforward. Fixed rates are typically lower than floating rates because the bank benefits from the certainty of your commitment.
The main disadvantage is inflexibility. If you want to repay the loan early (for example, if you sell the property or refinance), you may face break fees. These can be substantial — thousands or even tens of thousands of dollars — particularly if market rates have fallen since you fixed. Most banks allow a small amount of additional repayments (typically 5% of the loan per year) without penalty.
Floating Rate Mortgage Explained
A floating rate mortgage has an interest rate that can change at any time, based on your bank's current floating rate. In New Zealand, floating rates are closely linked to the Official Cash Rate (OCR) set by the Reserve Bank of New Zealand. When the RBNZ raises the OCR, floating rates typically increase within weeks; when the OCR drops, floating rates usually follow.
The main advantage is flexibility. You can make unlimited extra repayments, repay the loan in full at any time, and there are no break fees. This makes floating ideal if you expect a lump sum (inheritance, bonus, property sale) or plan to sell the property soon.
The main disadvantage is uncertainty. Your repayments can increase significantly if interest rates rise. A 1% increase on a $500,000 mortgage adds roughly $100 per week to your repayments. Floating rates are also typically higher than fixed rates, so you pay a premium for the flexibility.
Do You Need Both?
Many New Zealand borrowers use a split lending strategy — fixing a portion of their mortgage for certainty while keeping a portion floating for flexibility. For example, you might fix 70% of your loan on a 2-year term and keep 30% floating. This gives you the best of both worlds: predictable repayments on most of your debt, with the ability to make extra repayments on the floating portion.
Which Should You Get First?
Talk to a mortgage broker or your bank about the current rate environment and your personal circumstances. If you value certainty and are budgeting tightly, fix the majority. If you have variable income or expect to make extra repayments, keep more on floating. Consider splitting across different fixed terms (for example, one-third on 1 year, one-third on 2 years, one-third on 3 years) to smooth out rate changes over time.
Frequently Asked Questions
What are break fees and when do they apply?
Break fees apply when you repay a fixed-rate loan before the fixed term ends — typically because you sell the property or refinance. The fee compensates the bank for the interest they expected to earn. Break fees can range from a few hundred dollars to tens of thousands, depending on the loan size, remaining term, and how much rates have moved.
What is the OCR and how does it affect my mortgage?
The Official Cash Rate (OCR) is set by the Reserve Bank of New Zealand and influences all interest rates in the economy. Floating rates move almost directly with OCR changes. Fixed rates are influenced by expected future OCR movements and wholesale swap rates, so they can move independently of the current OCR.
Should I fix for the longest term available?
Not necessarily. Longer fixed terms give more certainty but are typically priced higher and come with greater break fee risk. In New Zealand, 1-2 year fixed terms are the most popular because they balance certainty with regular opportunities to reassess. Your mortgage broker can model different scenarios for you.
Related Terms
Deposit
GlossaryAn upfront payment made by the buyer when purchasing a property, typically 20% of the purchase price, held in trust until settlement.
Settlement
GlossaryThe day ownership of a property officially transfers from the seller to the buyer and the purchase price is paid in full.
LIM Report
GlossaryA Land Information Memorandum — an official council report summarising everything the council knows about a property.
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