Paying down the home loan

This is NOT intended to be financial advice, and is intended to be general opinions of mine. Talk to a financial advisor / your mortgage broker / bank for personalized and professional advice.

Fixed vs Floating vs Revolving

When it comes to home loans, understanding the difference between fixed, floating, and revolving loans is critical, as it can have a huge impact on your repayments and overall interest costs.

Fixed Rate Loan

A fixed-rate home loan is one where the interest rate remains the same for a set period, usually between one and five years. This means that your monthly repayments remain predictable, no matter what happens to interest rates in the wider economy. Fixed loans provide peace of mind and protection against rising rates, which is ideal if you want certainty in your budgeting. The trade-off is flexibility: many fixed loans limit extra repayments or charge penalties if you want to pay the loan down faster. Additionally, if interest rates fall during your fixed term, you won’t benefit until the term ends. Fixed loans are therefore well-suited for buyers who prioritise stability over potential savings from falling rates.

Floating Rate Loan

A floating, or variable, home loan has an interest rate that can change over time, typically in line with the Official Cash Rate set by the Reserve Bank or according to the lender’s pricing. Monthly repayments can go up or down depending on movements in the interest rate. Floating loans offer flexibility, as most allow lump sum payments or extra repayments without penalty. They also provide the opportunity to benefit if interest rates drop. However, the downside is unpredictability; repayments can rise if rates increase, so you need to be comfortable managing the fluctuations. Floating loans are a good choice for buyers who want more control over repayments and can handle potential rate changes.

Revolving Loan

A revolving or offset loan is slightly different. It is a home loan linked to a savings account, and the balance in that account offsets the mortgage principal on which interest is calculated. For example, if you have a $500,000 mortgage and $50,000 in a linked offset account, you only pay interest on $450,000. This arrangement can significantly reduce the interest you pay over time and potentially shorten the length of your mortgage. The funds remain accessible, giving you flexibility, but the interest savings depend on keeping money in the offset account. Revolving loans are most advantageous for buyers with savings or lump sums that they want to use to reduce interest costs while still maintaining access to their money.

30 Years is wildly inaccurate

The idea of a “30-year mortgage” in New Zealand is often misunderstood. While 30 years is typically cited as the maximum term for a home loan, it’s not a fixed timeline you are stuck with. In reality, the mortgage term is just a reference point for minimum repayments – how long it would take to pay off the loan if you only made the required payments and didn’t add anything extra. The actual duration of your mortgage is entirely up to you, based on how much and how frequently you choose to pay down your principal. Don’t be intimidated by the “30-year” label; it’s more of a guideline than a commitment.

Pay down at re-fix

One of the most useful features of New Zealand home loans is the ability to pay down principal when you refix your loan. For example, if you have a $1 million mortgage split into $700,000 fixed for one year and $300,000 fixed for six months, you can choose to pay off the $300,000 portion when it matures. This is particularly handy if you anticipate a windfall or extra savings in the next few years that you want to apply to your mortgage.

You can pay down at any time in rising interest rates with no penalty

Additionally, many banks allow you to make lump sum payments during a fixed term without penalty. Some lenders, like ANZ, permit up to 5% of the principal to be paid off once during the term without incurring break fees. Beyond that, you can still pay down any amount, but it may trigger penalty interest calculations. Interestingly, if interest rates have risen significantly above your fixed rate, the bank’s calculations often result in no penalty, effectively letting you reduce your mortgage at no extra cost. Conversely, if rates have fallen, paying down early may not be financially advantageous, so it often makes sense to wait until your next refix.