How To Decide If You Should Fix Or Float Your Mortgage

Fix or float? It’s always the big question asked by borrowers of their banks or financial advisors. But the best way to find out is to do the research yourself and make your own decision.

Since the Reserve Bank started keeping the Official Cash Rate the same, financial advisors, banks and economists have been predicting when the OCR will start rising again. Why? Because when the OCR rises, both fixed and floating interest rates will also begin to rise again.

With the OCR having sat at 2.50 since March 2011 and only having recently moved to 3.50 in July 2014 where it currently sits, floating mortgages are very popular. This is because floating rates are generally lower than fixed. But when the OCR rises, the race will be on to fix mortgages in order to save on interest costs.

OCR predictions for 2014-2015
Economists have only recently begun to change their viewpoints on when the Reserve Bank will begin to raise the OCR. Originally predicted to begin rising late 2014, it seems that we may have a longer wait until that happens due to New Zealand’s current inflation rate of 1%, below the Reserve Bank’s forecast of 1.3%.

Now the latest predictions say that the OCR will rise from mid to late 2015. With the high New Zealand dollar and low wage and inflation pressures putting no pressure on the Reserve Bank to raise the OCR, banks have passed on lower interest rates to their customers. With floating rates remaining slightly lower, many borrowers are choosing to take the gamble that rates will not rise and are floating all or part of their mortgage.

However recently lowered fixed interest rates have also started to entice borrowers, especially those seeking the stability of knowing the amount that needs to be repaid will be constant for a period of time. Maybe the choice on whether to fix or float is dependent on the borrowerís personality? Floaters are risk takers and fixed borrowers are not.

Over the long term though, it is recognised that fixing your mortgage will actually prove the cheaper of the two. Although floating rates will save you money for the first few months, a sudden rise or lack of personal diligence can see it costing you more money. Perhaps the best decision may be to do a combination of fixed and floating, based upon your research and the current predictions of the OCR by economists.

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