Fixed, Floating, and Split Loans: The Pros and Cons

Choosing the right home loan structure is one of the most important decisions you'll make when buying property in Auckland or anywhere across New Zealand. Whether you're a first home buyer or an upgrader looking to refinance, understanding the differences between fixed rate, floating rate, and split loan options can save you thousands of dollars over the life of your mortgage.

Let's break down these three main types of residential mortgage structures so you can decide which approach suits your financial situation.

What is a Fixed Rate Mortgage?

A fixed rate mortgage locks in your interest rate for a specific period, typically ranging from six months to five years. During this time, your mortgage rate stays the same regardless of what happens in the broader market.

The main advantages of fixed rates include:

• Certainty in your repayment amounts, making budgeting straightforward
• Protection if interest rates rise during your fixed term
• Peace of mind knowing exactly what you'll pay each month

The potential downsides:

• You won't benefit if interest rates fall
• Break fees can apply if you need to make changes before the term ends
• Limited ability to make extra repayments or lump sum payments on most fixed portions
• You're locked into the carded rates offered by banks and lenders at the time you fix

Most New Zealanders opt for either a 1 year fixed, 2 year fixed, or 3 year fixed term, though 5 year fixed options are also available. Your mortgage adviser can help you determine which term length aligns with your circumstances.

What is a Floating Rate Mortgage?

A floating rate mortgage (also called a variable rate) means your interest rate can change at any time based on market conditions and your lender's decisions. The floating rate mortgage structure offers maximum flexibility.

The benefits of floating rates:

• Freedom to make unlimited extra repayments without penalty
• No break fees if you want to refinance or sell your property
• Ability to take advantage of falling interest rates immediately
• Access to features like offset mortgage accounts or revolving credit facilities

The drawbacks:

• Your repayments can increase if interest rates rise
• Less certainty for budgeting purposes
• Floating rates are often higher than short-term fixed rates

What is a Split Loan?

A split loan (sometimes called a combination loan) divides your home mortgage into different portions. You might fix part of your loan while keeping another portion on a floating rate, or split between multiple fixed terms.

For example, on a property loan of $800,000, you could structure it as:

• $400,000 on a 2 year fixed rate
• $200,000 on a 1 year fixed rate
• $200,000 on a floating rate

This approach is popular among Auckland professionals because it balances security with flexibility.

Why consider a split loan structure:

• You get some certainty from the fixed portions while maintaining flexibility on the floating portion
• You can make extra repayments on the floating section to reduce principal faster
• If rates move, you're only partially exposed either way
• You can stagger your fixed terms so different portions come up for review at different times

Things to consider:

• Managing multiple loan portions requires more attention
• Each portion may have different features and restrictions
• You'll need to decide on the right mix for your situation

How Much Should You Fix vs Float?

There's no one-size-fits-all answer. Your ideal split depends on several factors:

• Your risk tolerance and preference for certainty
• Whether you're planning to make extra repayments
• Your views on where interest rates might be heading
• How long you plan to stay in the property
• Your borrowing capacity and overall financial position

Many mortgage brokers suggest keeping at least some portion floating if you plan to make regular lump sum payments or have irregular income that allows for variable repayments.

Understanding Your Loan to Value Ratio (LVR)

Whether you choose fixed, floating, or a split loan, your LVR affects the rates you'll receive. The LVR is the percentage of the property value you're borrowing.

• 80% LVR or lower typically qualifies for standard rates
• 90% LVR means a 10% deposit
• 95% LVR requires only a 5% deposit but usually incurs a Low Equity Premium (LEP)

The low equity margin (also called LEM) is an additional fee charged on low deposit home loans. Working with a mortgage adviser can help you avoid LEP where possible by exploring options from multiple banks and lenders including ANZ, ASB, BNZ, Westpac, and Kiwibank.

Additional Home Loan Features to Consider

Beyond the fixed vs floating decision, consider what home loan features matter to you:

• Redraw facility: Access extra repayments you've made
• Offset mortgage: Link savings accounts to reduce interest
• Revolving credit: Operates like a large overdraft
• Principal and interest vs interest only loan: Different repayment structures

These features are typically only available on floating portions or through specific loan structures.

Making Your Decision

Use a home loan calculator or repayment calculator to model different scenarios. See how your repayment amounts change with various interest rate movements and loan structures.

Remember that current rates change regularly, and what seems like special rates today might shift tomorrow. Focus on the structure that gives you the right balance of security and flexibility for your situation, rather than chasing the lowest rate at a single point in time.

Whether you're looking at an owner occupied home loan, considering your first home loan, or exploring options as an upgrader, the structure you choose should align with your financial goals and lifestyle.

A professional mortgage broker can access competitive rates across all major banks and explain the differences between table loan options, help you understand deposit requirements, and calculate your borrowing capacity using a borrowing calculator.

Call one of our team or book an appointment at a time that works for you. We'll help you understand which home finance structure makes sense for your Auckland property purchase or refinance.