Home Lending – The Basics

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In New Zealand, there are two main home loan interest rate types – fixed, and floating.

Fixed rates are where you lock-in a rate with the bank, and pay this same rate for a set period of time. Usual fixed rates in New Zealand range from 6 months up to 5 years.

Floating rates are variable, these can (and do) change at any time.

The key difference is really that fixed rates offer certainty, compared to floating rates which offer flexibility.

We’ll just go through some of the key differences:

  • Fixed rates in NZ are usually cheaper than floating rates which makes them more commonly used.
  • Fixed rates lock you in to a degree. So if you want to repay the loan early due to any number of reasons (selling the house / wanting to break the fixed rate to get a lower rate on offer / change banks) – then you will likely have to pay a break fee to the bank which is calculated at the time you are doing it. This can range from nothing, to several thousand dollars. So it’s important to not fix too long for your personal situation. For example, if you knew you were going to sell your house in 2-3 years, you wouldn’t fix your interest rates longer than this.
  • Floating rates offer lots of flexibility – for example, if you have some money coming in over the next short period (a bonus/commission, or inheritance for example), then you might consider the floating rate options as you can pay them off without penalty – you just pay a little more interest in the short term in exchange for this.

In our next few videos we’re going to talk about some common strategies when settling on a home loan structure. A key thing to remember is that you’re unlikely to ever get it perfect, so don’t over complicate it.