How long should you fix your mortgage for in NZ?

How long can you fix a mortgage in New Zealand?

Sorted, the government's financial capability service, describes fixed rates as running for a period of six months to five years. Banks advertise a rate for each term in that range, and the rate for each term moves independently, so the cheapest term today is not necessarily the cheapest one next month.

When a fixed term ends, the loan usually rolls onto the floating rate unless you choose a new fixed term. Your bank will normally write to you before the date with the rates on offer. Refixing is the moment you are free to choose a different length, split the loan differently, or move to another lender without a break fee.

What do you give up by fixing for longer?

Flexibility. Fixed loans limit how much extra you can repay without a charge, and ending a fixed term early, by selling or refinancing, can trigger a break fee. The longer the term, the more time there is for your plans to change before it ends.

Sorted puts the two limits plainly: fixed rates often have limits on how much you can raise repayments or make extra payments without paying charges, and if you sell your property or break a fixed loan, you may be charged a break fee.

The break fee is the cost of changing your mind. It is zero when rates have risen since you fixed, and can be large when they have fallen, because the bank is compensated for the interest it loses. Our break fee calculator shows the order of magnitude for your own balance and rates.

What do you give up by fixing for shorter?

Certainty. On a short term you face a new rate sooner, and nobody knows what rates will be then. If they have risen, your repayments rise at the next refix. If they have fallen, you benefit sooner. You are taking more of the rate risk yourself, in exchange for flexibility.

A short term also means more decisions: every refix is a point where you need to compare rates and choose again. For some people that is an opportunity, and for others it is a chore that ends with the loan sitting on a floating rate by default.

Fixed, floating or split?

You do not have to choose one. Sorted notes that you can split a loan between fixed and floating rates, and that this lets you make extra repayments without a charge on the floating portion. Many borrowers also split the fixed part across two or three terms so it does not all refix at once.

• Floating: the rate moves as the wider market moves. Usually higher than fixed rates, but you can repay extra or sell without a break fee.
• One fixed term: simplest. The whole loan refixes on one date, at whatever rates apply then.
• Split across terms: part fixed for a shorter term, part for a longer one. Each part refixes on a different date, which spreads the risk of refixing everything at a bad time.
• Fixed plus a floating or revolving portion: the fixed part gives certainty; the floating part takes lump sums and extra repayments.

What should you weigh up before choosing a term?

These are questions about your situation, and the answer to them is yours or a licensed adviser's to give, not a calculator's. What the repayment calculator can do is show what a given rate and term cost you, so you can see the difference between two options in dollars.

• How likely is it that you will sell, move or refinance before the term ends?
• Are you expecting a lump sum, such as a bonus, an inheritance or a property sale, that you would want to put against the loan?
• How much could your budget absorb if repayments rose at the next refix?
• Do you want to make regular extra repayments, and does the fixed term cap them?
• Would it help to have parts of the loan refixing at different times?