Should I Refix My Mortgage or Switch to Floating?

Floating or fixed?

Your fixed mortgage term is ending, and you are standing at a financial crossroads. To your left lies the comfort of certainty, the fixed path. To your right beckons the shimmering allure of flexibility, the floating option. Which road should you take?

A well-informed homeowner or property investor makes the best financial decisions, regardless of what the Reserve Bank of New Zealand (RBNZ) may or may not have announced last Tuesday, or any day, for that matter!

So, let's take a closer look.

The Lure of a Fixed Rate Mortgage

When you fix your rate, you lock in the interest rate and, therefore, your repayment amount for a set period, be it six months, two years, or five years.

Benefits of a Fixed Mortgage Rates: Comfort, Certainty, and Sharp Pricing

The primary benefit is ironclad budget certainty. For a set period, you know exactly what your payments will be. You know precisely what amount will leave your account every week, fortnight, or month, allowing you to accurately plan every other aspect of your life, from setting aside funds for your child’s schooling to saving for that well-deserved overseas holiday. This makes budgeting easier and you won’t be affected if rates rise.

When interest rates are climbing, fixing your rate allows you to hedge against future hikes. If the wholesale interest rate environment increases a week after you lock in a two-year fixed rate, your monthly repayments remain precisely as agreed. Your neighbour, however, may be grimly adjusting their budget. In a high-rate or rising-rate environment, the fixed rate is your defensive moat.

As an added benefit, fixed rates are historically lower than floating rates. Financial institutions charge a premium for the flexibility offered by a floating loan. Therefore, if you are strictly minimizing interest paid and maximizing stability over a medium-to-long-term period, the fixed option is often mathematically superior on day one.

What Are the Drawbacks of a Fixed Rate Mortgage?

The significant drawback of a fixed rate is the lack of flexibility. Most fixed-rate loans limit how much you can repay early without penalty, often allowing only a small percentage of the outstanding principal per year. This restriction can be frustrating if you receive a significant bonus, inheritance, or another windfall, and wish to repay some of this debt.

There are also break fees, which some call early repayment penalties.

If market interest rates drop substantially during your fixed term, you are locked into the higher rate. To break the contract and refinance at the lower rate, your bank will calculate a break fee. A break fee is a penalty paid by you, as you are breaking the deal or agreement to the bank (mortgage lender) about your repayment terms. This fee essentially covers the loss the bank incurs because they funded your loan using wholesale money at the time you fixed it, and they now must lend your principal back into the mortgage market at a lower rate.

These fees are often complex and calculated using wholesale market rates, not the retail rate you see advertised. As Westpac NZ explains,

"The prepayment cost is the difference between the wholesale interest rate when Westpac first borrowed from the market... compared to the wholesale interest rate on the date which you are prepaying the fixed loan."

Another drawback is with a fixed rate, you’re essentially trying to guess the future, or “time the market” as we call it in financial circles. Trying to time the fixed rate market is the financial equivalent of trying to decide what you’ll wear for all coming next year based on a long-range forecast. You will inevitably be either too hot or too cold, and you will look slightly ridiculous in the process.

Mortgage Floating Rates

Switching to a floating (sometimes called variable) interest rate is trading predictability for flexibility.

Floating rates move up and down in direct relation to market conditions, particularly the decisions made by the Reserve Bank of New Zealand (RBNZ) regarding the Official Cash Rate (OCR).

Understanding the mechanics does not mean you can predict the outcome. Economists are notoriously divided on the future trajectory of rates, and trying to predict the RBNZ’s next move is the preserve of highly paid analysts, and, often, those with the highest volume of wrong predictions!

What are The Benefits of a Floating Mortgage Rate?

The main advantage of a floating rate is freedom. You can make extra lump sum payments whenever you like, without incurring a penalty or fee. This flexibility is invaluable for those who might receive irregular commission payments, annual bonuses, other inconsistent sources of income, or even for those planning to sell their house within a short timeframe. The flexibility allows you to shorten the life of your loan aggressively and reduce the total interest paid over the term.

If market rates fall, your interest rate decreases immediately, and your repayments adjust downward. This is a fantastic and instantaneous cash-flow benefit.

Additionally, many floating loans allow you to use an associated offset account. This feature allows you to link your transaction or savings accounts to your mortgage, and the balances in these accounts directly reduce the principal amount on which you are charged interest. For instance, if you have $50,000 in your floating account, and your mortgage is $500,000, you are only charged interest on $450,000. This is a powerful, yet often underutilised, tool. Note: different banks have different names for this sort of facility.

Floating Rate Mortgage Drawbacks

There are two key drawbacks of floating rate mortgages:

1. Volatility. Especially if interest rates rise, your repayments increase instantly and without warning. A floating rate exposes your household budget to the full force of economic shifts. For families relying on consistent cash flow, this uncertainty can lead to stress and force difficult compromises in other areas of life. Switching to floating is essentially betting on interest rates falling or, at the very least, remaining stable. You need a robust financial buffer to comfortably absorb a sudden spike in the OCR.
2. Price. Your flexibility comes at an increased cost. Floating rates nearly always carry a higher interest rate than fixed rates to compensate the bank for the uncertainty.

Related material:

• Should you refinance your mortgage?
• Mortgage differences between major NZ banks
• How to pay off your mortgage early, but should you?
• Mortgage cash back
• Should you make extra mortgage repayments?

Why Not Both? Split the Risk Between Floating and Fixed

A decision between fixed and floating doesn’t have to be binary. One approach is to split your mortgage between fixed and floating portions. This hybrid method allows you to capture the best features of both worlds while mitigating the risks of going all-in on a single view of the future.

For example, a homeowner with a $600,000 mortgage might split the loan into three parts:

1. Fixed Portion (50% or $300,000): Fixed for three years. This secures the bulk of your debt and provides core budget certainty.
2. Fixed Portion (30% or $180,000): Fixed for one year. This portion rolls over sooner, allowing you to test the market and refix at whatever the current rate is, hedging against the risk of fixing the entire loan at a peak.
3. Floating Portion (20% or $120,000): This section is linked to your offset account. Any extra savings or lump sums, such as a commission or annual bonus, can be thrown at this portion penalty-free, reducing the principal and speeding up your repayment journey.

Splitting your loan up like this is simple risk management. It ensures only a portion of your loan is subject to break fees, and only a portion is subject to immediate market volatility. It transforms the decision from a gamble into a considered asset management choice.

Like anything in life, there are drawbacks of this too! For the worked example, these might include:

• Juggling maturity dates: The mental load on the homeowner is higher, as you are essentially managing three loans, not one. That will mean you will spend more time monitoring rate markets and have more refix decisions at different times. You must actively track the end date for each fixed portion`. In this example, if you forget to refix the 1-year portion (the $180,000) when it matures, it will typically roll onto the bank's often much higher default floating rate, instantly eroding any financial benefit you gained from the split.
• Most of the loan is still fixed. So, if interest rates fall, you’re still paying a higher interest rate than the market.
• The lost ability to switch banks or negotiate deals: By locking at least some of the mortgage into a three-year fixed portion, you cannot leave the bank. This can be a substantial drawback in New Zealand, as when you refinance, you can often negotiate:
  
  • Cash-back offers, which can frequently total $3,000 - $10,000
  • Sharper interest rates
  • Fee waivers

The Personal Balance Sheet: Your Risk Appetite

Ultimately, any market data, predictions, or news flow, can be just noise. What really matters is your life goals, and what you’re willing to do to achieve them.

Ask yourself these questions:

1. Do You Have Other Investment Opportunities? Are you a highly motivated person with other investments which demand more of your attention than your home mortgage? For instance, you might be rapidly accumulating sums in a share portfolio and wish to dedicate any surplus funds to that rather than additional mortgage repayments. In that case, you might be best to set up your mortgage in a way which requires the minimum necessary repayments.
2. How do You Assess Your Income Stability? Are you a highly paid employee whose income is tied to an annual bonus, or other irregular sums? A floating rate or a split loan with a large floating portion makes sense, as you may want to aggressively pay down debt when the bonus lands. Are you a stable, salary-earning professional with a young family? In this case, predictability might be key, suggesting a longer fixed term.
3. Do You Have a Savings Buffer? Do you have an emergency stash set aside which could cover up to six months’ worth of living expenses? If not, the variability of a floating rate could turn a minor rate rise into a financial crisis. A robust buffer is essential protection against market movement.
4. What Are Your Future Plans? Are you planning a major home renovation, expecting to upsize the house, or considering an investment property purchase in the next three years? Upcoming transactions require flexibility, making shorter fixed terms or a larger floating portion more sensible, as it reduces the risk of incurring large break fees when you sell or restructure the loan.
5. Do You Experience Sleepless Nights? How does uncertainty affect your mental well-being? If seeing a news headline about a rapid interest rate movements might cause you genuine distress, you’ll want to factor that in to how your mortgage is structured.

According to Nik Velkovski, Private Wealth and Lending Manager at Become Wealth,

"Deciding whether to refix, short or long, or switch to a floating rate isn’t about predicting the market. It’s about choosing what feels stable for you. Fixed rates bring certainty; floating rates bring flexibility. There’s no perfect moment to decide, only the option that fits your lifestyle, cash flow, and peace of mind."

The Bottom Line: Fixed, or Floating, or Both?

Stop looking at the mortgage market and start looking at your life.

The mortgage decision is not about perfectly predicting where rates will go, it is about preparing for your future. Whether you anchor yourself with a three-year fixed rate or more, embrace the flexibility of floating, or opt for the sophisticated balance of a mix of the two loans, your choice must serve your goals, not the financial news cycle.

An informed decision is wealth-building, alternatively, indecision is expensive.

Take control. Know your numbers. Design your financial future.

Book your complimentary initial meeting or call with our lending team to explore a mortgage solution tailored to your ambitions, and which lets you sleep soundly, regardless of what the interest rates do next.