Interest Rates: To Fix Or Not To Fix By Mike Pero

New Zealand interest rates have been at historic lows for some time, prompting much debate on whether or not now is the right time to fix the interest rate on your home loan.

In New Zealand, the base interest rate plummeted in 2008 and remained steady at an extraordinary low of around 2.5% until mid-2014. Since then we have seen rates start to increase slightly, prompting us to question if now is the best time to switch to a fixed rate home loan.

A fixed interest rate loan allows you to lock in an agreed interest rate with your lender. This way you don't have to worry about the rising and falling interest rates of your loan over time, even if the Reserve Bank decides to raise interest rates. Usually fixed home loans are for a set period – often one to five years – with the benefit of knowing exactly what your repayments will be each month.

Whilst having fixed monthly repayments is great for your peace of mind, there are some disadvantages. Fixed rate home loans often have less flexibility than a floating (variable) rate loan arrangement. You may be restricted from making extra repayments and, if the interest rate falls, you will miss any incremental savings.

For those still sitting on the fence, it’s well worth considering a combination or split rate home loan option. This type of loan arrangement allows a portion of your loan to be paid at a fixed rate and the remainder paid at a floating (variable ) rate . This type of loan will give you some reassurance in knowing roughly how much you will need to pay each month, as well as enabling you to take advantage of financial savings if interest rates fall. If interest rates rise, you’re also protected as only part of your loan is affected.

The decision of whether to fix or not to fix your interest rate ultimately comes down to how much financial risk you are willing and able to take. As with all such decisions, you should consider speaking with an expert. If you’re thinking about reviewing or switching from your current loan provider - why not discuss your options with a Mike Pero Adviser today?