Should your rental property mortgage be fixed or floating? Learn how to pick the best one for you and who to ask for help if you get stuck.
As a property investor, most of us have at least one rental property mortgage. Deciding whether to fix or float that mortgage can mean the difference between a profit or potentially scrapping the bottom of the barrel for cash. To make the best decision, you need to understand what each mortgage type can offer you. Let’s take a look …
What is a Fixed Term Mortgage?
A fixed rate mortgage is a loan that is fixed for a specific time. This can range from six months to even ten years, with some mortgage lenders. The interest rate is then set for the period of the loan agreement. As with any mortgage, you want to select the one which gives you the lowest interest rate.
Key points to consider with a fixed term rental property mortgage are:
- The interest rate remains fixed in place bringing a sense of certainty in the repayment structure
- Your mortgage payment doesn’t fluctuate, giving you certainty of mortgage expenses
- You won’t need to pay additional interest if the floating interest rate rises
What is a Floating Mortgage?
A floating rate mortgage varies with market conditions. It is tied to a base rate, but when that base rate is revised by the bank, the rate is adjusted by individual lenders up or down depending on what the markets are doing.
Key points to consider with floating rental property mortgage are
- You have more flexibility with your mortgage as you are not locked into a rate for a set period. If rates drop, you reap the benefits of paying less interest. But when rates rise, you pay more interest.
- You can increase payments to pay the mortgage off faster or pay it in full without penalty interest
Which Loan is Best for a Rental Property Mortgage?
Mortgage Definition Magnifier Shows Property Or Real Estate Loan
Once you understand the two main mortgage types, it’s decision time! Here is where a mortgage broker or your accountant can really earn their keep. Use their knowledge to help you decide which rental property mortgage is your best decision. Here are four questions you may want to consider before meeting with them:
- What are my plans for this property in the future?
- How much flexibility do I want regarding this property’s mortgage repayments?
- Are additional rental properties on the horizon, meaning more debt?
- Can I afford additional payments if interest rates rise?
Being well informed about your mortgage options will help you to make the best decision for your investment property mortgage. It is also important to choose the right property manager to care for your rental too. At Hollie Joss Property Management, we care for your property as if it was ours. Managing rentals all around Auckland, including the North Shore and Albany, you can rest easy knowing we’ve got everything under control. Give us a call today to find out more about how we can help you manage your investment property.
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