07 Jul Interest rates: Fix, Float or Flexi?
Interest rates are always the source of the latest hot news topic, but when you investigate your mortgage options there are so many different rates, types and offers to choose from. What is the difference between all of these and why do the rates vary between them?
Fixed rates are a locked in contract, like a gym membership, you can choose to have a fixed contract where your rates are locked in for a certain period of time. Providing certainty of your mortgage expense for those who are budget conscious. With the certainty this ‘locked in’ rate provides, the bank is typically able to offer you the lower rates available, particularly for the shorter to mid-term like 1-2 years.
Here’s an example of ANZ’s fixed rate offers:
Why are the longer fixed terms more expensive? Isn’t it ideal for the bank to keep you as a customer for that long?
No one could have predicted in January 2020 that COVID-19 was going to cause a world-wide lockdown and completely flip our lifestyles upside down. At that time, no one knew for certain whether house prices would crash or boom. This highlights that no one can predict with absolute certainty, anything. Banks don’t even know whether interest rates are going to rise or going to fall even lower than the record lows we’ve been seeing. So, they offer options to fix for the long term to attract customers who prefer the certainty of their mortgage payments in preparation for an uncertain future and are willing to pay a bit extra for the comfort. On the other side of that coin, the bank also wants their own certainty, hence why these rates are typically higher but also because they make more profit with higher interest rates.
What is the ‘Special interest rate’?
The special interest rates are like a reward for those that tick the box of that bank’s ideal customer. In ANZ’s case, someone with 20% deposit and will have their income paid into an ANZ bank account.
Can you break a fixed rate deal/change your fixed period?
Yes, but it can cost. Depending on the amount of money you’ve fixed and the time left in the period you’ve fixed for, the cost to change can vary from a few hundred dollars to a few thousand.
Floating rates can change without notice, as it keeps in line with what is happening with the Official Cash Rate (OCR) and the latest rates available. These rates can change without notice and are typically a bit higher than fixed rates, but it allows the flexibility to make larger one-off payments without any penalties (that would likely encounter with a fixed rate). It allows you to be flexible with your mortgage so you can fix it when you want to, if you want to. If you have fixed rate that is approaching the end of its fixed period and you haven’t re-fixed, you would automatically revert to a floating rate.
Revolving Credit (Flexi):
A revolving credit is like having a large overdraft. You only pay interest on what you owe. It is a great option to use as a main account where your income is deposited, so reduces the amount of mortgage to pay on that amount and is typically interest only. It’s more expensive and inline with floating rates that can change at any time. However, it allows flexibility if you receive payments like bonuses etc that can help to reduce the cost of your mortgage without paying any penalties. It’s great to use instead of a savings account if you have a mortgage.
It’s also useful if you top up your mortgage to undergo renovations, take a holiday, have a buffer of available money or even buy a car at a much lower rate than a personal loan.
Having a portion of mortgage set up as a revolving credit can be very useful but for some people, it’s hard to understand the benefit of seeing their main account constantly in negative. However, if you understand the power of mortgage, there is no need to be scared of it!
For example, your every day account could look like this:
The amount you would pay interest on would be the overdraft (OD) amount of $22,000, the available amount is $28,000 that you have available or have paid down.
Some banks also offer offset facilities, which is a little bit like a revolving credit where you only pay the floating interest rate on what you owe, but your money could be sitting in different accounts, eg:
What should I choose?
It’s completely up to you, you can fix the entire mortgage under one fixed term rate, split it up over 2-3 different fixed rates, fix and float, fix and revolving credit, the options are pretty much endless. As advisors, we can present and discuss options with you but we can’t tell you what you should do, as only you can make the decision that’s best for your unique circumstances.
The above mortgage types are just a few of the many ‘products’ that banks and lenders have on offer. If you’d like to know more about the power of mortgage and how to buy or invest in Auckland property, come along to our next workshop! CLICK HERE
Or, if you’re looking for mortgage advise, get in touch with us CLICK HERE
Lucia Xiao | firstname.lastname@example.org