One in five home owners with a mortgage does not know it is better to have a fixed rate rather than a floating rate when interest rates are expected to increase.

That's just one of the findings in the latest ANZ-Retirement Commission Financial Knowledge Survey.
If you're one of the 20 per cent who is not sure when it's best to fix or float your mortgage, this information from the Retirement Commission's Sorted website should help fill in the gaps.

Fixed interest rate loans
With a fixed interest loan the interest rate paid is fixed for a period from six months to five years. At the end of the term, a fixed interest loan automatically moves to a floating rate unless another fixed term is negotiated.

Pros of fixed interest rate loans
You know exactly how much each repayment will be over the term.
Rates are often lower than floating rates.
Lower rates can be locked in if market interest rates are rising.

Cons of fixed interest rate loans
Fixed rates often have limits on how much you can lift repayments or make lump sum payments without paying charges.
On a long term loan, there is a risk floating rates may drop below your fixed rate.

Floating rate (or variable rate) loans
Lenders of floating rate loans will lift or lower the interest rate as interest rates in the wider market change. This means repayments may go up or down.

Pros of a floating or variable rate loan
There is greater flexibility to make changes without penalty. For example, early repayment or changing the term of the loan.
It is easier to consolidate other costlier debt into floating rate loans by borrowing more.

Cons of a floating or variable rate loan
Floating rates have often been higher than fixed rates.
When rates go up the repayments also go up, putting a squeeze on budgets.

A mix of both
It is also possible to split a loan between fixed and floating rates. This allows extra repayments without charges on the floating rate portion while you get lower rates on the fixed portion.

To find out more about managing your mortgage visit www.sorted.org.nz

By Diana Crossan, Retirement Commissioner