What happens when my fixed rate expires?

If you do not choose a new rate before expiry, your loan typically rolls onto the bank's floating rate. Your bank will usually contact you before expiry to discuss options. This is a good time to shop around or renegotiate.

How are break fees calculated?

Break fees compensate the bank for the interest they expected to receive but now will not. They depend on the difference between your rate and current rates, the remaining term, and the loan amount. If rates have risen since you fixed, there may be no break fee.

Should I fix for longer when rates are low?

This is intuitive but not always correct. Longer terms cost more (higher rates) and reduce flexibility. If rates stay low for longer than expected, you may end up overpaying. Shorter terms with regular reviews often work out well.

Can I change from fixed to floating during the term?

Yes, but you will likely face break fees. The bank will calculate what it costs them to release you from the fixed rate agreement. This can be substantial if rates have dropped since you fixed.

Fixed vs Floating Rates for Investment Property NZ

The fixed vs floating debate is one of the most common questions property investors face. While there is no universally right answer, understanding the trade-offs helps you make informed decisions that suit your situation.

For investment property owners, interest costs are often the largest expense. The rate structure you choose affects your cash flow, your ability to refinance, and your exposure to market movements.

Understanding Fixed Rates

When you fix your interest rate, the bank guarantees that rate for a set period, typically one to five years. Your repayments stay the same regardless of what happens in the market.

Fixed Rate Benefits:

☐ Payment certainty for budgeting and cash flow planning
☐ Protection if rates rise during the fixed term
☐ Peace of mind, especially for negatively geared properties
☐ Often lower than floating rates in stable markets

Fixed Rate Drawbacks:

☐ Break fees if you repay early or refinance
☐ Limited extra repayment options during the term
☐ Miss out if rates drop significantly
☐ Less flexibility to restructure loans

Understanding Floating Rates

Floating rates (also called variable rates) move up and down with the market. When the Reserve Bank changes the Official Cash Rate, your rate typically changes within a few weeks.

Floating Rate Benefits:

☐ No break fees if you sell or refinance
☐ Unlimited extra repayments allowed
☐ Benefit immediately when rates drop
☐ Full flexibility to restructure at any time

Floating Rate Drawbacks:

☐ Payment uncertainty makes budgeting harder
☐ Exposure to rising rates
☐ Usually higher than short-term fixed rates
☐ Can create cash flow stress if rates spike

The Case for Splitting

Many investors split their loans across different rate types and terms. This approach, sometimes called hedging or laddering, reduces your exposure to any single outcome.

Example Split Structure:

$200,000: 1-year fixed
$200,000: 2-year fixed
$100,000: 3-year fixed
$100,000: Floating or revolving

Each year, a portion comes off fixed rate, giving you regular opportunities to reassess without breaking loans.

Special Considerations for Investors

Selling Properties

If you might sell a property in the near future, floating rates or short fixed terms make sense. Long fixed terms with break fees can eat into your sale proceeds if you need to repay the loan early.

Refinancing Flexibility

Fixed rates lock you in with your current lender for the fixed term. If you want the flexibility to shop around for better deals, consider keeping some lending on floating or timing your fixes to create regular review points.

Cash Flow Management

If your investments are negatively geared, predictable payments help you budget for the shortfall. Fixed rates can provide this certainty. Conversely, if you have strong cash flow and can handle variability, floating might be fine.

Debt Reduction Strategy

If you want to aggressively pay down debt, floating or revolving credit facilities allow unlimited extra payments. Many fixed loans limit additional repayments to $10,000 to $20,000 per year.

How to Think About Rate Predictions

Be sceptical of anyone who claims to know where interest rates are heading. History shows that even economists and banks get rate predictions wrong regularly. Some principles to keep in mind:

If rates were certain to drop, fixed rates would already be lower than floating
The market's best guess is already built into current pricing
Unexpected events can move rates in surprising directions
Making the "wrong" choice is not the end of the world; rates move in cycles

Rather than trying to predict rates, focus on what you can control: your cash flow buffer, your overall debt levels, and choosing a structure that lets you sleep at night.

Revolving Credit for Investors

Revolving credit facilities are a type of floating rate loan that works like a large overdraft. They are particularly useful for investors because:

Interest is calculated daily on the balance
Any funds in the account reduce your interest cost
You can draw funds as needed for deposits, repairs, or opportunities
Full flexibility to pay down and redraw

Some investors keep a portion of their lending in revolving credit as a buffer and opportunity fund, while fixing the majority for stability.

When to Review Your Structure

Do not just set and forget your rate structure. Good times to review include:

When any fixed rate term is coming up for renewal
When you are buying or selling a property
When there have been significant interest rate movements
When your circumstances or goals have changed
At least annually as part of your financial review

What Most Investors Do

In practice, most property investors use a combination:

Fix the majority of lending for stability (often 1 to 2 year terms)
Keep some on floating or revolving for flexibility
Ladder fixed terms so they expire at different times
Review and restructure when fixed terms expire

This balanced approach provides reasonable certainty while maintaining some flexibility.

The Bottom Line

There is no perfect answer to the fixed vs floating question. The right choice depends on your cash flow, risk tolerance, plans for the property, and market conditions. What matters most is having a considered approach rather than just defaulting to whatever your bank suggests.

Talk to a mortgage broker about your specific situation. They can model different scenarios and help you understand the trade-offs for your portfolio.