Avoid These 3 Mistakes When Choosing Your Rate Type

You're not just choosing an interest rate when you set up your home loan. You're choosing how much flexibility you'll have over the next few years and whether you'll pay a premium for certainty or leave yourself exposed to rate movements.

Most borrowers in Auckland pick a fixed rate because it feels safer, but that decision can cost you if your circumstances change or if you want to make extra repayments. Floating rates give you freedom but no protection from increases. A split loan tries to balance both, but only if you set it up correctly.

Fixed Rate Loans Lock In Your Rate and Your Options

A fixed rate mortgage holds your interest rate steady for a set period, usually between one and five years. You'll know exactly what your repayment will be each fortnight or month, and you won't be affected if rates climb during that time.

The tradeoff is that you're also locked in. If you want to sell your Auckland property before the fixed term ends, or if you come into money and want to pay down a large chunk of the loan, you'll likely face break costs. These can run into thousands of dollars depending on how much rates have moved since you fixed and how much time remains on your term.

Consider a borrower who fixed at 6.5% for three years when Auckland median property values were climbing. Eighteen months later, they receive an inheritance and want to pay off $50,000. Because current rates have dropped to 5.8%, the lender is losing the difference between what they'd contracted to receive and what they can now lend that money out at. That difference gets passed to the borrower as a break cost, which in this scenario could be $3,000 or more.

Most banks allow you to make some extra repayments on a fixed loan, usually up to 5% of the original loan amount per year, but anything beyond that triggers a penalty. If your income is variable or you're likely to receive bonuses, commissions, or lump sums, a long fixed term can work against you.

Floating Rate Mortgages Give You Full Control Over Repayments

A floating rate, sometimes called a variable rate, moves up or down in line with the Official Cash Rate and the bank's own funding costs. Your repayment changes whenever your lender adjusts their floating rate, which can happen several times a year.

You can pay off as much as you want, whenever you want, without penalty. You can also switch to a fixed rate at any time if you think rates are about to climb. That flexibility makes floating rates useful if you're planning to sell within six to twelve months, if you're waiting on a bonus or sale proceeds, or if you want access to features like an offset mortgage or revolving credit facility.

The risk is that rates can move against you quickly. A 0.5% increase on a $600,000 home loan in Auckland adds roughly $60 to your weekly repayment. If rates climb by 1.5% over twelve months, that same loan could cost you an additional $180 per week, which can pressure your household budget if you haven't planned for it.

Floating rates are typically higher than fixed rates to begin with, so you're paying a premium for the flexibility even before any rate increases occur. That gap between floating and fixed rates can be anywhere from 0.2% to 0.8%, depending on the lender and the term you're comparing it to.

A Split Loan Divides Your Borrowing Between Fixed and Floating

A split loan, also called a combination loan, lets you fix part of your mortgage and leave the rest floating. You might fix 60% for two years and keep 40% floating, or split it evenly, or use any other combination that suits your situation.

The fixed portion gives you certainty over most of your repayment, while the floating portion lets you make extra payments or access features like redraw or offset without triggering break costs. If rates drop, the floating portion benefits immediately. If they rise, the fixed portion shields you from part of the increase.

The structure works well if you want some protection but don't want to be completely locked in. It's also useful if you're not sure which direction rates are heading and you'd rather hedge than commit fully to one option.

As an example, a borrower purchasing in Auckland with a $700,000 home loan might fix $450,000 for two years and leave $250,000 floating. They make their regular repayments on both portions, but any extra cash goes onto the floating portion. Over two years, they pay down an additional $30,000 without penalty, reducing their overall interest and giving them the option to refix at a lower loan amount when the fixed term ends.

The downside is that managing two portions means two interest rates, two sets of terms, and potentially two break cost calculations if you exit early. It also requires you to think about how much to fix and for how long, which can feel more complicated than just picking one rate type and moving on.

How Much to Fix Depends on Your Income Pattern and Exit Timeline

If your income is steady and you're planning to stay in your Auckland property for at least three to five years, fixing a larger portion makes sense. You'll have certainty over your repayments, and you're less likely to need the flexibility that floating rates offer.

If your income fluctuates, or if you're likely to receive irregular payments like bonuses, commissions, or contract work, keeping more of your loan floating lets you pay down the principal faster without penalty. That can save you more in interest over time than the rate difference costs you.

Your deposit size also plays a role. If you're borrowing at 90% or 95% LVR, you'll be paying a Low Equity Premium on top of your interest rate. Once you've paid down enough to drop below 80% LVR, that premium disappears. Keeping a portion floating gives you the option to reach that threshold faster by making lump sum payments whenever you can.

For Auckland buyers expecting to move within two to three years, whether for work, family, or upsizing, a shorter fixed term or a higher floating portion reduces the chance of paying break costs when you sell. A one-year fixed rate or a 50/50 split gives you some rate protection without locking you in for too long.

Revolving Credit and Offset Features Only Work on Floating Portions

If you want to use a revolving credit facility or an offset mortgage to reduce the interest you pay, those features are only available on floating rate portions. An offset links your transaction or savings account to your home loan, so any balance in that account reduces the amount of interest you're charged. Revolving credit works like an oversized overdraft where your income goes straight onto the loan and you draw out what you need for expenses.

Both options can save you significant interest if you maintain a buffer in your accounts, but they require discipline. If you're not actively managing the account, the benefit disappears and you're left paying the higher floating rate for a feature you're not using.

If those features matter to you, you'll need to keep at least part of your loan floating or accept that the fixed portion won't have access to them. Some Auckland borrowers split their loan specifically to get the offset benefit on part of it while still fixing the rest for rate certainty.

Refixing Lets You Adjust Your Structure as Your Situation Changes

When your fixed term ends, you can choose to refix for another term, switch to floating, or change your split. That refixing point is a chance to reassess your situation and adjust your structure based on what's happened over the last one, two, or three years.

If you've paid down a chunk of the loan and you're now below 80% LVR, you might refix at a lower rate without the Low Equity Premium. If your income has become more stable, you might fix a larger portion than you did initially. If you're planning to sell within the year, you might switch entirely to floating to avoid break costs.

You're not locked into the same structure forever. Your home loan should adjust as your circumstances do, and refixing is the point where you make that adjustment.

Some lenders let you lock in a new fixed rate up to 90 days before your current term expires, which can be useful if you think rates are about to rise. Others will automatically roll you onto a floating rate if you don't give them instructions before the fixed term ends, which can catch you off guard if you weren't paying attention.

Working with a Mortgage Broker Saves You Comparing Rate Structures Across Multiple Lenders

Every lender prices their fixed and floating rates differently, and those differences change weekly. ANZ might have the lowest two-year fixed rate one week, while Westpac or Kiwibank might be more competitive the next. Some lenders offer lower carded rates but fewer features. Others have higher rates but better offset or revolving credit options.

A mortgage broker in Auckland compares those options across the main banks and non-bank lenders, and they'll structure your split based on your actual income, deposit size, and timeline rather than a generic recommendation. They'll also tell you which lenders allow higher penalty-free repayment limits on fixed loans and which ones offer the most flexible refixing terms.

If you're borrowing at a high LVR or if your income is self-employed or contract-based, a broker can also help you access lenders that might not be available directly or that have different criteria around low equity lending.

You're not paying the broker directly. They're paid by the lender when your loan settles, and their job is to make sure the loan structure works for you, not just to get the lowest rate on paper.

Call one of our team or book an appointment at a time that works for you.

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