What are the cons of a fixed rate home loan?

A combination of attractive market conditions and greater budgeting certainty has seen more and more Kiwis taking out fixed rate home loans in recent years. While current rates are certainly making fixed mortgages appealing for first home buyers, it’s important to note that this type of loan is not without it’s downsides.

Here are three things to keep in mind when considering taking out a fixed rate home loan:

1. Restrictions on extra repayments

Most fixed rate home loans have restrictions and/or strong disincentives (such as expensive fees) in place to prevent you from making extra repayments on your mortgage. This means that your home loan could take longer to pay off than it would under a floating arrangement, and expose you to unnecessary interest.

2. Market rates could drop

Fluctuations in the Official Cash Rate (OCR) do not affect fixed rate home loans – and this is both a blessing and a curse. If the OCR increases, you don’t have to worry about repayment hikes and sudden financial stress. However, if the OCR decreases, the economic benefits do not trickle down to fixed rate home loan customers, which can be incredibly frustrating.

3. Break fees

Almost all fixed rate mortgage products come with large break fees. If you choose to sell your property or prematurely terminate the home loan agreement for some other reason, you’ll be forced to pay a substantial penalty. Be sure to check the fine print before signing anything!

There are many pros and cons to the various home loan products in New Zealand, and what’s right for one person may not necessarily be the best option for you. Hop over to our home loan comparison tool for more insight into current fixed rate home loan options and take the next step in the home owner journey.

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