What is a Floating Interest Rate?

A floating interest rate, also known as a variable rate is when your home loan is subject to market fluctuations and in some cases in the Official Cash Rate (OCR) set by the Reserve Bank of New Zealand.

Floating rates work well when the OCR is lower than the fixed rates - you can take advantage of the lower rates. Generally floating rates have not been popular in New Zealand as fixed rates have always been lower than the floating rate.

In return for paying a lower loan rate, you take the interest rate risk: the risk that rates will go up in future. In cases where the yield curve is inverted yield curve, the cost of borrowing at floating rates may actually be higher; in most cases, however, lenders require higher rates for longer-term fixed-rate loans, because they are bearing the interest rate risk (risking that the rate will go up, and they will get lower interest income than they would otherwise have had).

Bear in mind since 2004 historically the yield weighted average interest rate for:
Floating is 9.55%pa
1 year is 8.74%pa
2 years is 8.92%pa
3 years is 8.39%pa
4 years is 8.91%pa
5 years is 9.05%pa

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