What is Floating Term Mortgage

Floating term mortgages are the opposite of fixed term mortgage and refer to a mortgage that comes with a variable or floating rate of interest. A mortgage is taken by people wanting to buy property and it is essentially a loan with the purchased property used as collateral. Since all mortgages come at a price, to be paid in the form of interest, the loan seekers can opt for a fixed term mortgage that comes at a fixed rate of interest free from any interest rate fluctuations, thus paying exactly the same amount year after year till the mortgage payment is completed. On the other hand, floating term mortgages have a variable interest rate, which proves beneficial to the investor since he benefits from a fall in the market rate of interest and has to then pay less interest on his mortgage. The term floating is used for any rate that varies with a change in a specified related index, and in this case it refers to the rate of interest varying for various reasons. It is also called an adjustable rate mortgage.

Floating term mortgages also come at lower interest rates than fixed term ones. The interest rate charged is often linked to the 90-day bank bill rate. If the interest rates rise, the loan repayment amount rises and affects individual budgets, while a decline in interest rates make the repayment amount cheaper and lead to savings. Floating term mortgages are recommended so that individuals benefit and save with every fall in interest rates. This type of mortgage also permits increasing the repayment amount without any penalty and individuals can ideally use a lower interest rate phase to make lump sum payments and save a considerable amount.

Floating rate mortgages start at a specific initial interest rate and for an initial adjustment period the rate remains at the same level. Rates are reset and subject to change with market interest rates only after this period. In certain cases, conversion to a fixed rate mortgage is permitted and any prepayments made do not carry any penalty, which is not the case of fixed term mortgages.

Floating term mortgages are popular in New Zealand and do not have a fixed time period for adjustment of the floating rate. Interest rate changes are generally made on a monthly rather than daily basis. But current market trends have encouraged borrowers to opt more for floating term mortgages, and the latest Reserve Bank figures reveal that for the first time, New Zealand has seen more than 50% of all mortgages as floating term.

Research reveals that people in New Zealand opt for floating term mortgages due to their aversion to risk, since the risk of inflation and hence higher interest rates is higher. Price variables are the most crucial deciding factor for those seeking mortgages.

Since there is a possibility of payment amounts made by the borrower increasing over time with an increase in interest rates, floating term mortgages come with the caps feature, which puts a limit or ceiling on the charges to be paid by the borrower.

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