Money
Mortgage strategies
Introduction
Should you "fix" or "float" your mortgage? We look at the pros and cons.
As well – for those trying to find the money that’ll get them into their first home – we have some tips on how to outwit the current credit crunch.
Plus, check out our mortgage guide for the latest rates, calculators and more.
State of the nation
At the end of March 2010 Kiwi households owed over $160 billion on their mortgages. Nearly a third was in floating-rate mortgages (where the interest rate can go up or down at any time).
The other two-thirds was in fixed-rate mortgages (where the interest rate is set for a specific period). Half of these fixed-rate mortgages are due to revert to floating rate mortgages within 12 months. So hundreds of thousands of homeowners have a choice to make: fix or float?
Traditionally most mortgages here have been fixed-rate. But attitudes have changed as a result of the global financial crisis: consumers who signed up to fixed rates of around 9 percent in the middle of 2008 looked on in disbelief when, 6 months later, floating-rate borrowers and new fixed-rate borrowers were offered interest rates of 6 percent or so.
When some of the 9 percent fixed-rate borrowers wanted to get out of their existing contracts and re-fix at the new lower rates, they were hit with what they saw as massive fees. The Credit Contracts and Consumer Finance Act 2003 allows lenders to charge a “break” fee to compensate for the interest they’d lose when loan contracts are broken and re-fixed at lower rates (see our Mortgage break fees report for more information).