Navigating Fixed vs Floating: Charting Your Course for Mortgage Structure Decisions

Shane Passfield-Bagley
Jan 19
17 min read

Whether you’re structuring a new home loan or refixing an existing mortgage, one big question looms: should you choose a fixed interest rate or a floating rate?

In New Zealand, the majority of homeowners tend to fix their mortgage rates for certainty (about 86% of mortgage debt was on fixed rates vs 14% floating as of late 2020). However, with many loans coming up for refixing each year and interest rates always in flux, it’s crucial to weigh your options carefully.

Just like planning an ocean voyage, deciding between fixed or floating (or a mix of both) means considering two main categories:

The hard numbers (market factors)
Your personal situation.

Think of market factors as the “weather and currents” – the external conditions like interest rate levels and economic outlook. Your personal factors are your “ship and crew” – your own goals, finances, and risk comfort. By evaluating both, you can plot a course that best suits your journey.

In this guide, we’ll break down those market and personal considerations, touch on some hybrid options (like revolving credit and offset accounts), and provide a handy checklist to help you make a confident decision on fixing or floating your mortgage.

Market Factors: Navigating the Financial Currents

Market factors are the external conditions that can influence your mortgage decision. These are largely out of your control, but understanding them will help you react wisely. Key market considerations include the current interest rates on offer, where experts predict rates might head, and your own perspective on market trends.

Current Interest Rates (Up-Front Costs)

One of the first things to examine is the interest rates currently on offer for various loan terms. The interest rate you lock in (or float on) will determine your immediate mortgage repayments – essentially the up-front cost of your decision. Take a look at what banks are offering for short-term fixes (1 or 2 years), longer fixes (3–5 years), and the floating rate. These numbers can vary significantly and often reflect market expectations. For example, in mid-2025 the average one-year fixed mortgage rate in NZ had fallen to around 4.9–5.0%, whereas standard floating rates were about 6.3–7% . In other words, fixing for a year was much cheaper upfront than staying on a floating rate at that time.

Why do such gaps exist? Banks adjust fixed rates based on wholesale funding costs and competition, while floating rates tend to move with the Official Cash Rate (OCR) and give you flexibility . A lower short-term fixed rate can save you money now, but remember it will expire relatively soon. A longer-term fixed rate might be higher today, but it guarantees that rate for a longer period. The tradeoff between different terms is essentially a bet on what might happen next: a cheap one-year rate could rise later, whereas a higher five-year rate could prove a bargain if overall rates climb in the coming years. '

Always shop around and compare current rates. Even a small difference in interest rate can significantly affect your total payments. Also be aware of any special deals – for instance, some banks offer lower “special” rates if you meet certain deposit or equity criteria. The key at this stage is knowing your baseline: what options are available right now for fixing or floating, and the immediate cost of each.

Market Trajectory & Rate Predictions

Next, consider where interest rates might be headed – the market trajectory. This involves paying attention to economic indicators, Reserve Bank signals, and forecasts from banks or economists. Interest rates in New Zealand tend to move in cycles in response to inflation, economic growth, and global conditions. Are we in an environment where rates are rising, peaking, falling, or bottoming out? The answer can inform your strategy.

For example, by mid-2025 the Reserve Bank of NZ had cut the Official Cash Rate from a peak of 5.5% down to 2.25% to help stimulate a weakening economy. Mortgage rates responded by dropping sharply – the average 1-year fixed rate fell from ~7.5% in 2024 to around 5% in 2025 . Economists at that time predicted rates were near a floor, with perhaps one last small OCR cut to ~3.0% on the cards. In practical terms, that meant the window to lock in those low fixed rates was potentially closing. In a different scenario (for instance, a few years earlier in 2021–2022), the trend was the opposite – rates were climbing fast due to inflation, and many experts were forecasting further increases.

The lesson is: if the consensus is that rates will rise, you might lean toward fixing for longer now to “lock in” today’s rate before it goes up. Conversely, if rates are expected to fall or remain low, you might prefer a shorter fixed term or even a floating rate to take advantage of future drops. Just remember, forecasts are educated guesses, not guarantees. It’s wise to prepare for the unexpected – interest rates have swung from double digits to record lows within the past couple of decades in NZ . Use expert insights as a compass, not an infallible prophecy.

Personal Market Outlook (Gut Feel & Experience)

Aside from official forecasts, your personal outlook or intuition about interest rates can play a role – but handle it with care. Some borrowers (and advisors) have years of experience or follow financial news closely and may develop a gut feeling about where rates are headed. Perhaps you believe that rates “must come down soon” due to a recession risk, or you feel that inflation is here to stay and rates will keep rising. It’s natural to have an opinion, and this personal market view can influence your comfort with fixing or floating.

If you’re confident in your prediction (and prepared to act on it), you might tailor your strategy accordingly. For instance, someone who genuinely believes interest rates will drop in the next 6–12 months might choose a short fixed term or stick to floating, essentially betting on that decline. On the other hand, if you suspect rates could spike, you’d be inclined to fix for longer now. However, be cautious – even professional economists get it wrong, and unexpected events can upend any forecast. Relying on personal predictions is essentially a form of market timing, which carries risk.

A good approach is to stress-test your assumption: ask, “What if I’m wrong?” If you float expecting cuts and instead rates rise, can you handle the increased cost? If you fix long expecting hikes and instead rates fall, will you regret missing out on lower rates? By considering these what-ifs, you can decide how much to let your personal hunch guide you. It’s perfectly fine to admit uncertainty and base your decision more on the other solid factors (current budget, risk tolerance, etc.) rather than a crystal ball. In short, factor in your market outlook only to the extent that you’re comfortable with the gamble – if you’d prefer not to gamble at all, lean more on certainty (fixed rates) and personal needs instead.

Personal Factors: Steering by Your Own Compass

Every homeowner’s situation is unique, so beyond the market numbers you need to examine your personal factors. These include your life plans, financial goals, and comfort level with risk. Think of this as plotting a course that suits your own ship. A choice that’s perfect for one person (say, a two-year fix) might not fit another’s circumstances. Here we break down the key personal considerations: your upcoming goals or changes, your approach to savings and cash flow, your risk tolerance, how much flexibility you need, and specific scenarios where floating is beneficial.

Short- to Mid-Term Goals and Plans

Start by reviewing your life plans in the short to medium term (the next few years). Are there any foreseeable changes that could affect your mortgage or housing situation? Common examples include: changing jobs, a potential relocation, starting or growing a family, major travel plans, renovations, or the possibility of selling your home or buying another. These plans matter because they determine how long you’re likely to stick with your current mortgage and how much flexibility you might need.

If you suspect you might sell or move in the near future, a long fixed rate could be problematic – breaking a fixed loan early can incur hefty break fees (the penalty for opting out of a fixed term can wipe out any interest savings). In such cases, opting for a shorter fixed term or a floating rate (which you can exit anytime without fees) gives you agility. For example, a young couple expecting to upgrade to a bigger house in 2 years might avoid fixing their loan for 5 years; a one- or two-year fix or partial floating would make it easier to restructure when the time comes.

Consider also any known large expenses or windfalls. Perhaps you plan on a big overseas holiday next year, which means you’d rather keep your mortgage payments lower and retain some savings – floating could let you make minimum payments and throw extra money at the trip. Or conversely, if you’re due a significant bonus or inheritance soon, you might want the ability to pay a chunk off the mortgage right away. Fixed loans typically limit extra repayments or charge fees for it, whereas floating loans let you drop in lump sums without penalty. Thinking through these life events will clarify how “locked in” you want to be. In essence, align your mortgage structure to your timeline: stable situation and long horizon can pair with a longer fix, while imminent changes or the need to adapt call for more flexibility.

Savings Goals and Cash Reserves

Next, reflect on how you manage your money between saving vs. paying down debt. This is about your cash flow strategy. Some people prefer to funnel every spare dollar into the mortgage to become debt-free faster; others like to maintain a healthy savings buffer for emergencies or future investments. Your preference here can influence your loan structure.

If you’re someone who values having cash on hand, you might not want to commit to large fixed loan repayments that strain your monthly budget. A floating rate (or shorter fixed term) could allow you to pay a little less when needed and save up cash on the side. More intriguingly, New Zealand has products like offset accounts and revolving credit facilities that serve as a middle ground between saving and paying off the loan. With an offset mortgage, for instance, you keep money in your savings account but it offsets your loan balance – effectively you pay interest only on the difference. This means your savings still earn you a benefit (by cutting interest costs) while remaining accessible if you need them. A revolving credit loan is like a big overdraft; your income can sit in the account to reduce the balance (and interest charged), but you can withdraw funds anytime up to the credit limit. We’ll discuss these more shortly, but the point here is: if having cash flexibility is important, you might structure part of your lending to allow that (e.g. a portion on an offset/floating facility), rather than locking every dollar into a fixed, non-accessible loan.

On the other hand, if you are determined to clear your debt ASAP, you might choose a shorter-term fixed rate with a higher repayment amount, or make sure your loan allows extra payments. Some fixed loans let you pay a bit extra each month or annually without fees – take advantage of that if it fits your goal. If your priority is saving up for another purpose (say an investment property or a business venture), you may want to keep your mortgage payments lower (perhaps interest-only for a time, or just minimum required) so you can accumulate cash. It’s a balancing act between debt reduction and liquidity. Be honest about which is more valuable to you in the coming few years, and structure your loan accordingly.

Risk Tolerance (“Play the Market” vs. “Set and Forget”)

Your risk appetite is a crucial personal factor in the fix vs float decision. This comes down to how comfortable you are with uncertainty and potential cost fluctuations. Fixing your rate is like choosing stability – you set and forget your payments, knowing they won’t change for the fixed period. Floating is inherently uncertain – you’re playing the market, for better or worse, as your rate can change at any time in response to economic and market conditions.

Ask yourself: How would I feel if my mortgage rate jumped by 1% overnight? If that prospect is terrifying and would keep you up at night, it’s a sign you have a low tolerance for interest rate risk – leaning toward a fixed rate (at least for the majority of your loan) might be the better choice. Fixed rates offer repayment certainty; you know exactly what your payments will be, which makes budgeting much easier and shields you if rates rise. The trade-off is that if rates drop, you won’t benefit (unless you break the loan and potentially pay a fee). Some banks also restrict extra payments on fixed loans, which can limit your ability to respond to changing circumstances.

If the idea of fluctuating interest doesn’t faze you – or you even find it intriguing to try and beat the market – then you likely have a higher risk tolerance. You might be comfortable with a floating rate or a shorter fixed term, accepting that your repayments may vary and could increase if rates climb. This approach can pay off when rates fall or stay low, but you need the financial resilience to handle increases. It’s important to note that risk tolerance isn’t just emotional; it’s also about your financial capacity. Even if you personally don’t mind volatility, consider whether your income could absorb a significant rate rise. Sometimes people overestimate their comfort until it actually happens.

A common strategy for those in the middle ground is to split the loan – fix a portion for stability and leave a portion floating. This way, you’re not all-in on one bet. If rates rise, the fixed part protects you (to a degree), and if rates fall, the floating part lets you capture some of the benefit. Splitting can be a useful compromise if you’re unsure about your risk stance or want a bit of both worlds.

Flexibility vs. Stability Needs

Consider how important flexibility is to you versus the value you place on stability. This overlaps with risk tolerance but focuses on practical needs: do you anticipate needing to adjust your loan or tap into equity soon, or do you prefer to lock things in and not think about it for a while?

Situations demanding flexibility include the possibility that you might refinance or restructure your loan in the near future. For example, maybe you’re thinking of topping up the mortgage for renovations, or you might want to switch banks to get a better deal or access equity for an investment. Fixed loans tie your hands during the fixed term – you can get out or restructure, but it may involve break fees or timing it to the end of the term. If you know you’ll want to make changes, keeping a portion of your lending on floating (or a short fixed term) can save you hassle and cost. It gives you the freedom to refinance or repay early without incurring penalties.

On the flip side, if you have no foreseeable changes and you simply want stability, then a longer fixed term can provide peace of mind. For instance, locking in a 3- or 5-year fixed rate means you don’t have to think about your mortgage again for that period – you’ll have stable repayments and can focus on other aspects of life or finances. Many people value this certainty, especially in times of volatile or rising interest rates. They’re effectively buying insurance against rate fluctuations by fixing the rate. You might pay a bit more for a longer fix compared to a short-term rate, but you’re paying for the comfort of knowing exactly what will happen.

In deciding your balance of flexibility vs stability, you might again consider a split-loan approach. It’s quite common for Kiwi borrowers to put, say, 80% of their loan on a fixed term and 20% on floating (often in an offset or revolving credit loan). The fixed portion gives stability, while the smaller floating portion gives you wiggle room to make extra repayments or changes. As one consumer finance expert notes, having at least part of your loan on floating lets you make extra repayments or lump-sum payments at any time without penalty. It’s about finding the mix that fits your need for certainty and your need for freedom.

Floating – When Does It Make Sense?

Given all the above, in what scenarios does choosing a floating rate (for either your whole mortgage or a portion of it) really make sense? Floating is essentially the most flexible but least predictable option. Here are a few situations where a floating mortgage can be advantageous:

You plan to pay down a chunk of your loan soon: If you’re expecting a windfall, bonus, or other lump sum that you intend to put into the mortgage, floating ensures you can do so without any fees. There are no break costs or limits on extra repayments with a floating loan, so you can immediately apply that money to reduce your debt. For example, if you’re selling another property or due an inheritance in six months, keeping your loan floating until then would let you drop the proceeds straight in.
Interest rates are likely to drop: If economic signs or your gut feeling suggest that rates will fall in the near future, a floating rate lets you benefit from those reductions right away (since banks typically pass on OCR cuts to floating rates). You’re not locked into a higher rate. Timing the market this way is risky – you could be wrong – but when done prudently it can save money. Some people float when they believe an official rate cut is around the corner, then switch to a fixed rate after rates have fallen to a comfortable low.
You need maximum flexibility for life changes: Perhaps you might sell or refinance at an unknown date, or you’re on the market looking for a new house while still owning your current one. Keeping a loan floating in these interim periods is common because you can exit or change the loan anytime. Similarly, if you’re between fixing periods and unsure what to do, you might go on floating temporarily while you assess your options, knowing you’re free to fix at the next decision point without delay.
You want to utilise offset or revolving credit facilities: As mentioned, offset accounts and revolving credit mortgages are only available on floating interest arrangements. If you plan to use these tools to manage your money, you’ll need at least that portion of your lending on a floating rate. For instance, you might keep a $50,000 revolving credit as part of your loan (floating) to serve as your emergency fund and day-to-day account, while the rest of your loan is fixed. Many New Zealand borrowers do exactly this, maintaining a core fixed loan and a smaller floating/offset portion on the side.

While floating has its benefits in the right scenarios, always remember the downside: your rate can increase whenever the market or the bank decides. If the Reserve Bank hikes the OCR, a floating borrower will feel it, sometimes immediately. That’s why floating makes the most sense either as a short-term solution or in combination with strategies to mitigate interest (like offsets, or plans to pay down quickly). It generally does not make sense to float long-term purely to “wait for a drop” if that drop isn’t likely – you could end up paying a lot more interest in the meantime. So use floating deliberately and re-evaluate often. If circumstances change (say, rates start rising sharply), be ready to review your strategy – you might lock in a fixed rate for safety. Floating is freedom, and with freedom comes the responsibility to stay on top of your mortgage’s condition.

Revolving Credit and Offset Accounts: Middle-Ground Tools

Before we conclude, let’s briefly touch on revolving credit and offset mortgages – special loan features that frequently come up in structure conversations. These tools offer a hybrid approach that can complement your fixed vs floating decisions. Essentially, they provide a way to have your cake and eat it too: you keep money accessible (like in a savings or checking account) while still reducing interest on your loan, striking a balance between holding savings and paying down debt.

Offset accounts link your everyday savings account to your mortgage. The money in your account stays in your control, but the bank offsets your loan balance by that amount when calculating interest. For example, if you owe $500,000 on your loan and have $40,000 in an offset account, you’ll only be charged interest as if you owed $460,000 . Your normal loan repayments then work to pay off that effectively smaller balance, which helps you clear the mortgage faster. Importantly, your money isn’t actually spent on the loan – it’s just sitting there reducing what interest is charged. This way, you maintain a savings cushion while still saving interest.
Revolving credit is like a giant overdraft secured against your home. You get an account with a credit limit (say $50,000) and you can deposit your income into it and spend from it freely, as long as you keep the balance below that limit . Every dollar that sits in the account reduces your loan balance for that day, cutting interest, and you only pay interest on the outstanding balance. There’s usually no set principal repayments required beyond the interest – it’s up to you to discipline yourself to keep the balance down. Revolving credits give tremendous flexibility: in a good month you might throw extra money in and reduce the loan, and in a tight month you might draw money back out for expenses. This flexibility can be “dangerous if you treat it like free money,” as it requires strict self-control. The advantage is that, much like an offset, it lets you use spare cash to save interest without permanently parting with that cash.

Both offset and revolving credit facilities come at a cost of slightly higher interest rates or fees in many cases (often a bit higher than standard floating rates, and some revolving accounts have monthly fees). And as noted, they must be on floating interest – you can’t have a fixed-rate revolving credit. Banks also sometimes limit how large these facilities can be, especially if you have a low deposit, due to the risk and flexibility involved. In practice, a lot of borrowers adopt a mix-and-match approach: for example, most of the loan might be on a fixed term (for a low rate and structure), and a smaller portion on a revolving credit or offset on floating. This way you get stability on the bulk of your debt and a handy flexible portion to park savings or manage cash flow.

We bring up these tools because they’re a great middle ground between simply hoarding savings in the bank versus throwing every dollar into the mortgage. If used wisely, an offset or revolving credit can shave years off your mortgage by leveraging your income and savings. But they are not suited for everyone – if you don’t carry surplus cash or might be tempted to constantly redraw and overspend, a revolving credit could turn into a “debt treadmill” rather than a debt reducer. Always consider your personality and habits before opting in. The main takeaway is that loan structuring doesn’t have to be all-or-nothing: you can fix part, float part, and use these facilities to strike a balance that aligns with both the market context and your personal style.

With the market factors, personal considerations, and possible hybrid strategies in mind, you’re in a good position to make an informed decision (or a mix of decisions) about fixing or floating your mortgage. To wrap up, use the following checklist to ensure you’ve covered all bases when choosing your mortgage structure.

Mortgage Structure Decision Checklist

Check current interest rates: Gather the latest rates for various fixed terms (1-year, 2-year, 5- year, etc.) and the floating rate from your bank or broker. Know your baseline for the cost today of each option.
Note the rate outlook: Look at what the Reserve Bank and economists are saying about the direction of interest rates. Are cuts, hikes, or stability forecast in the coming year or two? This can guide whether to lean short or long on your rate term.
Consider your own view: Reflect on your personal perspective or gut feeling about interest rates. Do you strongly believe rates will drop or rise soon? Weigh how much you want to act on this hunch versus playing it safe.
List upcoming life events: Write down any near-future life changes (job moves, relocating, having kids, etc.) and financial events (expected bonus, inheritance, big purchase) that could affect your mortgage needs or ability to make payments.
Decide on savings vs. extra payments: Determine if you’d rather keep extra cash in the bank for flexibility (emergency fund, future investments) or put it toward your loan to become debtfree faster. This will influence whether tools like offsets or extra repayment options are important for you.
Assess your risk comfort: Ask yourself honestly if you’d lose sleep over potential rate rises on a floating loan. If you need peace of mind, favor fixing a good portion. If you can handle volatility or have capacity to absorb higher payments, you can afford to float more of your loan.
Determine needed flexibility: Consider how easily you might need to restructure. If you plan to refinance, top-up, or even sell in the short term, avoid long fixed terms. If stability is more valuable and no changes are expected, a longer fix can be suitable.
Consider hybrid options: Think about splitting your loan or using an offset/revolving credit facility. For many, a combination (part fixed, part floating with an offset account) provides a balance of stability and flexibility. Ensure any floating portion aligns with a strategy (e.g. you have savings to offset, or will make lump-sum payments) rather than floating without a plan.

By running through this checklist and examining both the market conditions and your personal situation, you’ll be steering your mortgage decision with a solid understanding. Remember, the “right” choice can differ from one person to the next – it’s about finding the structure that best fits the current financial climate and your own life voyage. Armed with this insight, you can approach your next refix or new home loan discussion with confidence, knowing you have your bearings in the sea of options. Good luck, and happy navigating!