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Fixed Rates
The interest rate you pay is fixed for a defined period. At the end of the term, a fixed interest loan automatically
reverts to the standard floating rate prevailing at the time unless you negotiate another fixed term.
Advantages:
Disadvantages:
Capped Rates are a variation of fixed loans where the interest rate cannot rise, but will drop if floating rates drop
below the capped rate. In other words, you can have a bob each way.
Floating Rates
Lenders of floating rate loans will lift or lower the interest rate as interest rates in the wider market change. This
means your repayments may go up or down. Volatility of floating interest rates in recent times has been driven by
the Reserve Bank changing the Official Cash Rate (OCR). This is the base rate that the Reserve Bank lends
money to the trading banks. Upward movement of the OCR is used as a device to curb inflationary pressure in the
economy.
An increase of 1% in the OCR will usually translate to a similar rise in the floating mortgage rate.
Advantages:
Disadvantages:
Combined Mixed Fixed & Floating
It is possible to split a loan between fixed and floating rates. This lets you make extra repayments without charge
on the floating rate portion while you get lower rates on the fixed portion.
How you split your loan is important and can be worked out by considering the total extra cash you're likely to get
from work bonuses or the like over the period you've set the fixed rate for. This is the amount you could put on a
floating rate.
The interest rate you pay is fixed for a defined period. At the end of the term, a fixed interest loan automatically
reverts to the standard floating rate prevailing at the time unless you negotiate another fixed term.
Advantages:
- You know exactly what your commitment will be over the term of the loan.
- Fixed rates are generally lower than floating rates.
- You can lock in lower rates if you suspect market interest rates likely to rise.
Disadvantages:
- Fixed rates often have limits on early repayments or balloon payments if you wish to make principal
reductions. - If you take a long term fixed rate, there is a risk floating rates may drop below your fixed rate.
- If you have a change of circumstance and sell the property, you might have to pay penalties to break your
fixed rate term. The usual penalty amount is about 3 months interest.
Capped Rates are a variation of fixed loans where the interest rate cannot rise, but will drop if floating rates drop
below the capped rate. In other words, you can have a bob each way.
Floating Rates
Lenders of floating rate loans will lift or lower the interest rate as interest rates in the wider market change. This
means your repayments may go up or down. Volatility of floating interest rates in recent times has been driven by
the Reserve Bank changing the Official Cash Rate (OCR). This is the base rate that the Reserve Bank lends
money to the trading banks. Upward movement of the OCR is used as a device to curb inflationary pressure in the
economy.
An increase of 1% in the OCR will usually translate to a similar rise in the floating mortgage rate.
Advantages:
- You can usually make lump sum repayments or shorten the loan period by increasing your monthly
payments without incurring a penalty. - It is easier to consolidate other costlier debt into floating rate loans by incorporating such things as Hire
Purchase or credit card debt into a single loan secured against your house.
Disadvantages:
- Floating rates are generally higher than fixed rates.
- Floating rates can be volatile especially in times of rising inflation where the Reserve bank tries to curb
consumer spending by effectively increasing the cost of household borrowing.
Combined Mixed Fixed & Floating
It is possible to split a loan between fixed and floating rates. This lets you make extra repayments without charge
on the floating rate portion while you get lower rates on the fixed portion.
How you split your loan is important and can be worked out by considering the total extra cash you're likely to get
from work bonuses or the like over the period you've set the fixed rate for. This is the amount you could put on a
floating rate.
| General Mortgage Categories |
If you are a first time borrower or a seasoned investor, you need to consider which mortgage product suits your
circumstance. Amongst other things you need to consider the length of time you intend holding onto the property
and make a risk assessment of your future earning potential.
It would be true to say that you will be offered a confusing array of financial packages. You need to consider the
pros and cons of each to fit with your own financial circumstance.
The following covers the general categories.
circumstance. Amongst other things you need to consider the length of time you intend holding onto the property
and make a risk assessment of your future earning potential.
It would be true to say that you will be offered a confusing array of financial packages. You need to consider the
pros and cons of each to fit with your own financial circumstance.
The following covers the general categories.
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| PO BOX 9018, Wellington 6141 | phone: (04) 240-0124 | fax: (04) 232-4414 | email: valuer@ vcnz.co.nz Innovation + Experience |
Innovation + Experience |