One of the biggest decisions you'll make when taking out a mortgage is whether to fix your interest rate or let it float. This choice can save or cost you thousands of dollars over the life of your loan, yet many homeowners make the decision without fully understanding the implications.

The truth is, there's no one-size-fits-all answer. The right choice depends on your personal circumstances, risk tolerance, market conditions, and financial goals. Let's break down everything you need to know to make an informed decision.

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 in New Zealand. During this time, your interest rate and regular repayments remain constant, regardless of what happens in the broader market.

Common fixed rate terms in NZ:

• 6 months
• 1 year
• 2 years
• 3 years
• 4 years
• 5 years

What is a Floating Rate Mortgage?

A floating rate mortgage (also called a variable rate) moves up and down with the market. Your rate is typically tied to the Official Cash Rate (OCR) set by the Reserve Bank of New Zealand, plus a margin set by your lender.

When the OCR changes, your interest rate will usually change within weeks, which directly affects your repayments.

Fixed vs Floating: The Key Differences

Advantages of Fixing Your Mortgage

1. Certainty and Budgeting Confidence

The biggest advantage of fixing is knowing exactly what your repayments will be. This makes budgeting straightforward and removes the stress of potential rate increases.

Ideal for: First-home buyers on tight budgets, people with variable income, or anyone who values predictability over flexibility.

2. Protection Against Rising Rates

When you believe interest rates are at or near their lowest point and likely to rise, fixing locks in the lower rate and protects you from increases.

3. Peace of Mind

Many homeowners sleep better knowing their repayments won't suddenly jump. This psychological benefit shouldn't be underestimated, especially for first-home buyers already dealing with the stress of new homeownership.

4. Easier Long-Term Planning

Fixed rates make it easier to plan for other financial goals. You know exactly how much of your income goes to your mortgage, making it easier to budget for holidays, home improvements, or saving for other goals.

Disadvantages of Fixing Your Mortgage

1. Break Fees Can Be Expensive

If you need to make changes during your fixed term, you'll likely face break fees. These can run into thousands of dollars and apply when you:

• Sell your property
• Refinance to another lender
• Pay off a large lump sum beyond allowed extra repayments
• Switch from fixed to floating

2. Limited Extra Repayment Options

Most fixed rate mortgages in NZ allow only limited extra repayments (typically $5,000-$20,000 per year). If you come into money and want to pay down your mortgage faster, you're restricted.

3. Missing Out on Rate Decreases

If interest rates fall after you fix, you're stuck paying the higher rate until your fixed term ends. You watch others benefit from lower rates while you're locked in.

4. Opportunity Cost

The time you spend in a fixed rate at a potentially higher rate represents money you could have saved or invested elsewhere.

Advantages of Floating Your Mortgage

1. Maximum Flexibility

Floating rates give you complete freedom to:

• Make unlimited extra repayments without penalty
• Pay off the entire mortgage early if you can
• Switch to fixed or another lender anytime without break fees
• Restructure your loan as needed

Ideal for: People expecting windfalls (inheritance, bonus, property sale), those with irregular income who want to make large payments when they can, or anyone who might sell soon.

2. Benefit Immediately from Rate Drops

When the Reserve Bank cuts the OCR, you benefit within weeks through reduced repayments or faster principal reduction.

3. No Break Fees Ever

You can change your mind anytime without penalty. This flexibility is valuable if your circumstances change unexpectedly.

4. Better for Short-Term Ownership

If you plan to sell within 6-12 months, floating avoids potential break fees when you settle your mortgage early.

Disadvantages of Floating Your Mortgage

1. Exposure to Rate Increases

The flip side of benefiting from rate drops is suffering when rates rise. Your repayments can increase significantly and quickly.

2. Budgeting Uncertainty

When your repayments can change every few weeks, it's harder to budget precisely and can create financial stress.

3. Higher Average Rates

Floating rates are typically 0.5-1.5% higher than fixed rates at any given time, because you're paying for flexibility.

4. Requires Active Monitoring

You need to watch interest rate trends and be ready to switch to fixed if you believe rates will rise. This requires attention and timely decision-making.

The Split Strategy: Best of Both Worlds?

Many savvy borrowers don't choose between fixed and floating - they split their mortgage across both.

Common split structures:

• 50% fixed / 50% floating
• 70% fixed / 30% floating
• Multiple fixed terms with a floating portion

Why this works:

• The fixed portions provide stability and protection
• The floating portion offers flexibility for extra repayments
• You benefit partially from rate decreases
• You're partially protected from rate increases
• Different fixed terms mean portions come up for review at different times, reducing the risk of having to refinance everything at a bad moment

Laddering Strategy: Advanced Approach

Some borrowers use a "laddering" strategy with multiple fixed terms ending at different times.

Benefits:

• Every year, one portion comes up for refixing
• You regularly have opportunities to reassess and respond to market conditions
• Reduces the risk of fixing your entire mortgage at the wrong time
• Smooths out interest rate volatility over time

When Should You Fix?

Consider fixing when:

• Interest rates are low or rising: If rates are historically low or showing an upward trend, locking in current rates protects you from increases.
• You need budget certainty: If unexpected payment increases would stress your finances, the peace of mind from fixed rates is worth it.
• You're a first-home buyer: The predictability helps you adjust to homeownership without the added stress of variable payments.
• Economic outlook suggests rate increases: If inflation is high and the Reserve Bank is signaling rate increases, fixing protects you.
• You're on a tight budget: If you're stretching to afford your mortgage, you can't afford the risk of rate increases.
• You're risk-averse: If financial uncertainty keeps you awake at night, fixed rates provide valuable peace of mind.

When Should You Float?

Consider floating when:

• Interest rates are high or falling: If rates are at historic highs or showing a downward trend, floating lets you benefit from decreases.
• You have surplus income: If rate increases won't stress your budget, you can take advantage of the flexibility.
• You plan to make extra repayments: If you want to pay down your mortgage aggressively, floating gives you unlimited flexibility.
• You might sell soon: If there's a chance you'll sell within 12 months, floating avoids break fees.
• You're financially sophisticated: If you actively monitor economic conditions and can make timely decisions, floating lets you optimize your position.
• You have an emergency fund: A solid buffer means you can absorb payment increases if rates rise.

What's the Right Choice in 2025/2026?

As of late 2025, New Zealand is in an interesting position. After a period of aggressive OCR increases through 2022-2023 to combat inflation, mortgage rates are now coming down substantially in tandem with the decreasing OCR.

Current environment considerations:

Fixed rates: As of November 2025, the average 1-year fixed rate is 4.49-4.50%, and the average floating rate is 5.80-6.09%. If you believe rates will remain stable or increase, fixing provides protection.

Floating rates: Sitting between 5.80% (Kiwibank, the lowest) to 6.09% (Westpac), these are higher than fixed rates but offer flexibility. If the RBNZ cuts the OCR significantly over the next 12-18 months, floating borrowers could benefit.

Expert perspective: Many market observers expect further OCR cuts by RBNZ in the next months in order to reinvigorate the economy. The OCR has been cut to 2.5% as of October 2025, with most economists expecting it to bottom out around 2.00-2.50% in late 2025/early 2026, and some experts predict 1-year rates could drop below 4% in early 2026.

Consequently, many advisers are currently recommending shorter terms on fixed rates. This means clients are enjoying the currently seen low rates while maintaining flexibility to benefit if rates fall further.

However, every borrower's situation is unique, and predictions about rate movements are never certain.

Speak to one of our advisers to find out what we think will happen in the market, how this may affect your situation, and what's best for you in the current environment.

Common Myths About Fixed vs Floating

Myth 1: "Fixed rates are always safer"
Reality: While fixed rates provide payment certainty, they're not always financially optimal. If rates fall significantly, fixed borrowers lose out and may face large break fees if they need to change their situation.

Myth 2: "Floating always costs more"
Reality: While floating rates are typically higher than fixed rates at any point, if the market moves in your favour, floating can cost less over time.

Myth 3: "You should fix when rates are low"
Reality: When rates are very low, they're more likely to rise than fall further. Sometimes floating when rates are low captures the benefit of the low rate with flexibility, before potentially fixing when rates start rising.

Myth 4: "You can't change once you've chosen"
Reality: Most fixed mortgages come up for review every 1-3 years, and you can always move from floating to fixed. Your choice isn't permanent.

Questions to Ask Before Deciding

• What's my risk tolerance? Can I handle payment fluctuations, or do I need certainty?
• What's my financial buffer? Could I cope with a 1-2% rate increase?
• What are my plans for the next 1-5 years? Am I likely to sell, refinance, or make major changes?
• Do I want to make extra repayments? If yes, floating or a split structure works better.
• What's my budget like? Am I stretching to afford payments, or do I have comfortable surplus?
• Where do I think interest rates are heading? While no one can predict perfectly, your view on rate direction should inform your choice.
• How much attention do I want to pay to my mortgage? Floating requires more active monitoring.

Getting Expert Advice

The fixed versus floating decision significantly impacts your finances over time. While this guide provides a framework, your personal circumstances matter enormously.

At INNOVEST, we help you:

• Assess your unique financial situation and risk profile
• Analyze current market conditions and rate forecasts
• Model different scenarios to show potential outcomes
• Structure your mortgage optimally (fixed, floating, or split)
• Time your rate decisions based on market movements
• Review and adjust your strategy as circumstances change

Our service is free for borrowers - we're paid by lenders when your mortgage is arranged, so there's no cost to getting expert guidance on this important decision.

Your Next Steps

Ready to make an informed decision about fixing or floating your mortgage?

Book a free consultation with INNOVEST today. We'll:

• Review your current mortgage structure
• Discuss your financial goals and risk tolerance
• Explain current market conditions and forecasts
• Recommend an optimal strategy for your situation
• Help you implement the right structure
• Provide ongoing support as market conditions change

Don't leave thousands of dollars on the table by guessing. Let our expertise work for you.