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What is a Floating loan and it's advantages and disadvantages
Published by Scott Miller
What is a Floating Loan?
A floating loan, also known as a variable rate loan or adjustable rate loan, is a type of loan where the interest rate can fluctuate over the life of the loan based on changes in a benchmark rate (Official Cash Rate) set by the Reserve Bank of New Zealand.
This contrasts with a fixed rate where the interest rate remains the same throughout the term of the loan.
Advantages of a floating loan:
- Flexibility: The interest rate on a floating loan can change based on the market conditions, allowing borrowers to take advantage of lower rates if they occur.
- Good for short term lending: If users of a floating rate are aware of money coming their way. E.g., Inheritance, sale proceeds from an existing property or asset.
Disadvantages of a floating loan:
- Interest rate risk: The interest rate on a floating loan can increase, potentially resulting in higher monthly payments.
- Budgeting and financial planning: Uncertainty over future interest rate changes can make budgeting and long-term financial planning more difficult for borrowers.
- Risk of rate hikes: If the market interest rate goes up the borrowers would have to pay more interest which can be a burden on the borrowers.
If you're looking to explore your mortgage options, please don't hesitate to contact us. Our team of experts will work with you to understand your financial goals, pros and cons of different mortgages and work to find the best solution for you.
You can contact us by phone at 021 34 36 48 or by email at scott@amsnz.co.nz.