Which is better for Property Investors?

Great consideration must be taken when deciding between fixed vs variable rate loans.

There are many different types of property investment loans and lenders available and it can be difficult to know where to begin, which type of loan to choose and how much to borrow.

So is now the time to lock in a low fixed rate, or are variable rates the way to go?

Getting this decision right from the outset is important as it can potentially save you thousands of dollars in interest repayments, help you reduce risk and ultimately build a successful property investment portfolio.

What influences interest rates?

Variable home loan interest rates fluctuate according to the Reserve Bank of New Zealand (RBNZ) Official Cash Rate (OCR).

The RBNZ will increase the OCR with the aim of slowing the property market activity.

The increased borrowing costs eventually result in reduced buyer demand and sales activity in the property market followed by lower numbers of building approvals and downward pressure on property prices.

When the economy slows, the RBNZ does the opposite and reduces the OCR.
When interest rates are comparatively low, it is the Reserve Bank's intention that housing affordability improves, buyer and investor demand will pick up, and the market receives fresh demand and upward pressure on prices.

While the Reserve Bank sets the prevailing official cash rate, interest rates for home finance are also influenced by market forces, both local and international, and as a consequence banks will require smaller or larger lending margins depending on market risk factors, creating additional volatility in interest rate levels.

Variable rate loans

A variable home loan means that the rate of interest can rise or fall at the discretion of the lender.

Variable rate loans are considered to be the most flexible on the market and allow lenders the freedom to make extra repayments, redraw funds from the loan and split the loan if need be.

Fixed rate loans

Fixed rate loans mean the rates of interest charged on the loan amount does not change for the agreed duration of the loan, commonly from 1 -10 years.

At the end of the fixed loan period, the borrower can choose to revert to the current variable rate, or go into another fixed interest period.

To provide fixed rate home loans, lenders access funds with relatively fixed costs over longer terms - which means fixed mortgage rates depend on the market's expectations on the projected average interest rates over the new few years.

Split rate loans

A split loan offers means you can take part of the loan at a variable interest rate and part of your loan as a fixed interest rate.

The overall loan amount is still considered as your total loan, but you are able to pay different repayment amounts on each split component.

A consideration when deciding between variable and fixed loans is to weigh up the benefit of some of the introductory or 'honeymoon' rates some lenders offer to kick start standard variable loans for their borrowers.

A low 'honeymoon' rate can be applied to the loan for an introductory period of 6 to 12 months before the rate changes back to the standard variable.

So how do you choose which type of loan is best for you? We have all the pros and cons for you in this infographic.