News | Personal Finance
22 Feb 2018 21:37
NZCity News
NZCity CalculatorReturn to NZCity

  • Start Page
  • Personalise
  • Sport
  • Weather
  • Finance
  • Shopping
  • Jobs
  • Horoscopes
  • Lotto Results
  • Photo Gallery
  • Site Gallery
  • TVNow
  • Dating
  • SearchNZ
  • NZSearch
  • Crime.co.nz
  • RugbyLeague
  • Make Home
  • About NZCity
  • Contact NZCity
  • Your Privacy
  • Advertising
  • Login
  • Join for Free

  •   Home > News > Business > Features > Personal Finance

    Think Before Switching You Whole Mortgage To A Floating Rate

    In a dramatic change over the last couple of years, everyone’s moving to floating-rate mortgages. Is this a good idea?


    For the first time since 1998, when the Reserve Bank started keeping tabs on this, floating mortgages outweigh fixed – albeit only just. A year ago, floating mortgages made up less than a third of the total, and just over three years ago, it was only 13 per cent.

    What’s more, half the fixed rate mortgages have less than a year to run. If the current trend continues, a year from now floating mortgages will clearly dominate.

    It’s not hard to see why people have switched. From 2002 until 2008, fixed mortgage rates were considerably lower than floating. But suddenly, in 2008, all rates plunged – from floating rates above 10 per cent and fixed rates above 9 per cent to around 6 per cent for both.

    All was well for those whose fixed-rate terms happened to end around then. They could move to either a new fixed or floating rate, both much lower. But many people - caught with fixed-rate loans with several years to run - found themselves paying way higher interest than the current rates.

    Some gulped and paid large early repayment penalties to switch to floating rates quickly. Others gritted their teeth until their fixed term has ended.

    In the meantime, flxed rates have risen somewhat. Floating rate loans now seem to be the obvious choice. But are people overdoing the move to floating?

    One clear advantage of fixed rate mortgages is that you know where you stand. At least those stuck on fixed rates in 2008 weren’t suddenly asked to pay more than they had managed in the past.

    But if floating mortgage rates can drop from over 10 per cent to 6 per cent in less than a year, they can do the reverse too. If you are struggling to pay a 6 per cent floating rate now, could you cope if it rose several percentage points?

    You might plan to switch from floating to fixed if rates start to rise, but how can you tell when they are rising enough to make that move? The first upward movement might be just a jiggle on a graph that then trends back down. You decide to wait and see if the next two mortgage rate changes are upwards, in which case you’ll switch.

    The first change is up, but the next one is down a tad. Perhaps the trend is back down. You wait a bit longer. By the time you are convinced that rates are seriously on the rise again, and move from floating to fixed, the fixed rate is considerably higher than if you had switched months earlier.

    The point is that nobody, not even the experts, really knows what way interest rates will move – let alone how fast and how far.

    What to do? If you are in a fairly strong financial position, it’s probably best to make half your mortgage fixed and half floating. Then, whatever happens to rates, you’ll win some and lose some. It certainly beats losing the lot. To hedge your bets further, you might make some fixed for only a year or two, and some for longer.

    If you are financially iffy – perhaps feeling uncertain about job security – it might be better to keep 60 or 70 per cent of your mortgage fixed. For you, the risk of floating rates rising fast is more of a concern than missing out on the advantages of floating rates falling.

    © 2018 Mary Holm, NZCity


     Other Personal Finance News
     10 Sep: Spring clean your finances
     13 Aug: Plan ahead to give yourself a debt-free Christmas!
     10 Jul: Wise up to clear credit card debt
     07 May: Ways to prepare for the unexpected
     30 Mar: Time for a financial progress check
     10 Feb: Studying up on NZ Super
     10 Jan: Managing the back-to-school bills
     Top Stories

    RUGBY RUGBY
    Super Rugby week-two preview panel More...


    BUSINESS BUSINESS
    Shares gain as investors take a2 above $9b More...



     Today's News

    Entertainment:
    Oscar Isaac knew he wanted to marry her after he saw his pregnant wife take care of his sick mother 21:35

    Rugby League:
    McLean faces NRL Storm front in NQld debut 21:15

    Entertainment:
    Matt LeBlac is “sure” Jennifer Aniston is “doing okay” following her split from Justin Theroux 21:05

    Technology:
    Russia-linked internet bots trying to make the world an angrier place 20:35

    Entertainment:
    January Jones has insisted she is not dating Nick Viall 20:35

    Entertainment:
    George and Amal Clooney have donated $500,000 to the March For Our Lives movement 20:05

    Entertainment:
    Liam Gallagher has said the key to being a “rock star” is having “loud farts” 19:35

    International:
    Winter Olympics speed skaters and the athletes whose unusual bodies suit their sports 19:05

    Entertainment:
    Birdman has described his fiancée Toni Braxton as his “life” 19:05

    Business:
    Shares gain as investors take a2 above $9b 18:55


     News Search






    Power Search


    © 2018 New Zealand City Ltd