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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.
Advantages of a floating loan over a fixed loan include:
- 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 over a fixed loan include:
- Interest rate risk: The interest rate on a floating loan can increase, potentially resulting in higher monthly payments. This can be a significant risk for borrowers, especially if interest rates rise significantly.
- 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 and find the best solution for you.
We'll guide you through the process and help you understand the pros and cons of different types of mortgages, so that you can make an informed decision. Contact us today to schedule a consultation and get started on your path to homeownership, or restructure an existing loan.
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