How long should I fix my mortgage for?

Sue Tierney

Fixing your interest rate for the appropriate term is one of the best ways to stay on top of your mortgage by getting certainty regarding your repayments.


Much like going for a check-up with your doctor, getting advice on how long to fix your loan is essential in ensuring you can maximise your mortgage repayments without straining your finances. Additionally, given how mortgage rate increases have continued throughout these past several months, getting a professional opinion on how long to fix your mortgage has become essential in navigating this uncertain time.


What is the difference between a fixed rate and a floating rate?


Before diving into how long you should fix your mortgage, it's essential to understand the difference between a fixed rate and a floating rate.


Going for a fixed rate allows you to "lock in" your mortgage interest rate for a set period - usually measured in years. This enables you to have consistent mortgage repayments based on your chosen term - making budgeting easier. As a downside, this also prevents you from changing your repayment amount without incurring additional charges.


On the other hand, going for a floating rate (also known as a variable rate) allows you to remain flexible regarding how you want to repay your mortgage. This option is typically considered by borrowers who intend to make lump-sum payments to pay off a more significant chunk of their mortgage faster. However, this option will also expose you to interest rate fluctuations, preventing you from having consistent repayments that you can easily budget for.


Should I fix it for a longer term or a shorter term?


While there are several factors that you and your financial adviser must consider when deciding how long to fix mortgage rates, the decision will eventually boil down to one thing: choosing between certainty or flexibility.


Going for a longer-term fixed rate


If getting certainty regarding your monthly repayments is a priority, then fixing for a longer term is recommended. This ensures that your repayments will remain the same for a more extended period, allowing you to plan your budget for the coming months or years much easier. 


Going for a longer-term loan interest rate will also protect you from potential increases in mortgage rates for a longer duration.


On the other hand, fixing for a longer-term also comes with disadvantages. 


First, going for a longer-term will lock you out from potentially lower loan interest rates that may pop up in the future. 


Second, going for a longer-term also means you are committed to consistently meeting your repayments for much longer. Should you require to adjust your repayments due to unforeseen circumstances, you may incur an additional cost - known as a break fee - before you can fix your mortgage for a different term and rate. This additional fee may also apply if you decide to pay off your loan ahead of schedule through a lump sum payment.


Going for a shorter term fixed rate


On the opposite side of the spectrum, you can also decide to fix your mortgage for a shorter term - typically given in six-month or one-year loan interest rates. This is an excellent option for borrowers expecting significant changes in their financial situation in the coming months. 


These changes may come in the form of higher income due to a coming promotion or the addition of a new income earner in the household. On the other hand, events like a significant work injury or the addition of a baby to a family typically lead to lower income or higher expenses. In both cases, going for a shorter term will allow the borrower to remain flexible and adjust their repayments based on their current financial situation without paying additional fees.


Why you should get financial advice


While you may thoroughly understand your circumstances and how these affect your finances, keeping up with all the different factors that go into structuring a home loan is often best left to the professionals - mainly financial advisers. Collaborating with an independent financial adviser will help you get objective financial advice on how long to fix your mortgage and enable you to explore more complex options when it comes to fixing mortgage interest rates.


The third option: Going for a split home loan


Unlike the options discussed above, a split home loan allows you to benefit from the certainty of having a fixed rate while still retaining the flexibility of having a floating rate. However, this home loan structure is often more complex to set up optimally.


How does a split home loan work?


To illustrate how a split home loan works, consider the following example: 


50% Floating Rate, 50% Fixed Rate (two years)


In this example, the mortgage is divided into two portions: a 50% floating rate portion and a 50% fixed rate portion. As mentioned earlier, the key benefit of a floating rate is the flexibility it gives the borrower in terms of making lump sum repayments towards their mortgage. With this in mind, the 50% floating rate portion of the loan will allow the borrower to consistently make lump-sum payments to shave off up to half of their mortgage as quickly as possible. 


On the other hand, the 50% fixed rate portion of the loan will still protect the borrower from potential interest rate increases. In addition, this fixed portion will also provide a degree of certainty in terms of the borrower's repayment amount.


This example is an essential representation of what a split home loan could look like. However, based on the borrower's goals, home loan structures can easily increase in complexity. Consider the following split home loan examples:


1. 25% Floating Rate, 75% Fixed Rate (three years)

2. 40% Floating Rate, 30% Fixed Rate (two years), 30% Fixed Rate (three years)


Each home loan structure has its benefits and disadvantages. However, the important thing is getting a home loan structure that is tailored to your specific financial situation and goals. This is where talking to a financial adviser comes in handy.



Talk to our team


Our team has decades of experience in the New Zealand housing market. If you need help figuring out how long to fix your mortgage, we would love to chat with you.

We're here to help you with home loans, personal finance & insurance.

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