Fixed vs. Floating Rates: The Key Differences
From Aaron’s YouTube: “fixed vs floating, which is better? #newzealand #firsthome #kiwisaver ##nzfirsthome #nzmortgage”
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Posted 4 June 2025
The short version
- Fixed rates are usually cheaper than floating rates and lock in your rate for a set term (e.g. two years at 5%).
- Floating rates change with the market, which can be an advantage or disadvantage depending on rate movements.
- Floating rates typically allow unlimited extra repayments, while fixed rates usually limit extra repayments to 5% of the loan amount per year.
- The right structure depends on your repayment goals, financial situation, and life events like upcoming inheritances.
How fixed and floating rates work
When you take out a mortgage, you'll choose how to structure it between fixed and floating rates. Fixed rates lock in your interest rate for a set period, like two years at 5%. This gives you certainty—your rate won't change whether market rates go up or down.
Floating rates move with the market, which means they're typically higher than fixed rates. The advantage is that you benefit if rates drop, but you also carry the risk if they rise. Unlike fixed rates, floating rates don't lock you in for any set period.
The extra repayment difference
The biggest practical difference comes when you want to make extra repayments. With floating rates, you can usually pay as much extra as you want, whenever you want, without penalties. This flexibility is ideal if you come into extra money or want to pay down your mortgage faster.
Fixed rate loans typically limit extra repayments to about 5% of your loan amount per year. For a $1,000 weekly repayment on a $1 million loan, 5% equals $50,000 per year or roughly $1,000 extra weekly. This still allows substantial extra payments, but with boundaries that vary by bank.
Choosing what's right for you
The best structure depends on your financial situation and goals. If you want certainty and a lower rate, fixed might suit you. If you want repayment flexibility and can handle rate fluctuations, floating could be better.
Consider upcoming life events too. An inheritance or bonus might make you value floating's unlimited repayments. Or if you're risk-averse about rate changes during your fixed term, fixed provides stability. A mortgage adviser can help weigh these factors.
This is general information, not personalised financial advice. For advice on your situation, talk to Aaron.
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