Martin Hawes: Choose a path and stick to it

Fixed or floating? This is the big question that exercises just about everyone with a home loan.

There are two ways of looking at the fixed or floating question: one way says that you try to profit as much as you can, consistently trying to pick the cheapest rates to save as much money as possible.

The second way is about risk reduction, using fixed rates for certainty and to make sure that you never have a cash flow crisis.

You cannot achieve both these objectives at the moment. New Zealand now has a positive yield curve meaning that short-dated money is cheaper than longer-dated.

For years, New Zealand's yield curve was negative and so longer-dated fixed-rate money was cheaper than short-dated.

This meant that you could get certainty (minimum risk) at the best price; taking a two or three-year term for the mortgage was a no-brainer. No longer - our positive yield curve means that you cannot have your cake and eat it too. Now you have to make a choice.

That choice ought to largely revolve around your own particular financial position - you have to be very clear about what is important to you.

Those who have some fat in their budgets may want to try to profit by picking the best rates. That will mean at the moment they take a floating rate, running the risk of a sudden spike in interest rates which could catch them out (that's why they need some fat in the budget).

Taking a floating rate means profiting right now but you have to plan to leap into a fixed rate before a spike in rates.

This is not easy - when the money markets move, they can move very quickly.

Timing is important and if you get it wrong, you could be stranded. Trying to profit is not something for everyone - the risk is high and you have to back yourself to move just at the right time.

If the budget is tight, you should fix.

Even though I think that interest rates will stay low for a while yet, when they move it could be that they move a long way and very quickly.

If this would make your life difficult, you should fix your rate now - you may profit by waiting but you might also come unstuck - and those with a tight budget can't run that risk.

I think that most people should be biting the bullet and fixing now.

This is not so much a view on where interest rates are heading but instead on most people's risk profile.

In fixing, you should take a ladder approach: split your loan so that some is on one year, some on two years and some on three years.

Having rates across the yield curve like this means that you are re-fixing a part of your loan every year.

The key is to decide whether you are in a position to try to save money on your mortgage by floating; or whether you are risk averse and need therefore to fix.

Don't try to have split objectives - that just does not work any more.

* Martin Hawes is a financial adviser. His disclosure statement can be found at www.martinhawes.com