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Interest rates…. do I fix or float?

Before Lockdown, it was well publicised that the Reserve Bank was planning to raise the Official Cash Rate (OCR), in an effort to try and slow down a racing housing market.

Cue a snap lockdown, and the OCR hike was put on hold in order to wait and see how another lockdown would affect things, with the promise that once lockdowns were over the rate would rise. However, many banks chose to pre-empt the increase, and went ahead and increased their interest rates right away.

Since we have seen interest rates beginning to rise, and combined with the promised OCR increase, we are often asked whether we recommend fixing or floating your mortgage.

First, let’s take a look at fixed vs floating rates.

A fixed rate mortgage is where your interest rate is locked in for a specific term. The longest you can generally lock in for is 5 years. This means if the interest rates skyrocket, you will be paying a lower amount. It also means if they drop (which is unlikely at the moment) you could be paying more.

Fixed rates are usually lower than a floating rate and it gives the borrower certainty around what they need to repay for a set period of time. The only downfall is that there are usually early repayment charges, so if you want to pay more off your mortgage than you agreed to, you might be hit with fees.

A floating rate mortgage is generally at a higher rate than a fixed rate, It fluctuates with the interest rate changes, so you are always paying the current rate. Obviously if the rates rise, you will be paying more, and if they drop you pay less.

Floating rates allow you to repay your mortgage earlier with no repayment fees, which is a bonus if you are someone who earns commission or has a fluctuating income.

There are huge pros and cons to both of these mortgage rates, and whether we recommend you fix or float depends a lot on your individual situation.

Loans can be split into part floating and part fixed, and we can create a custom plan for you and take into account your individual circumstances. Give us a call today if this is something you would like to discuss or for any further advice.



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