What's "laddering" in finance and how can it help with your debt?

Laddering is a way to manage both term deposits and mortgages that can help reduce risk and improve your outcomes. They work by putting different "maturity" dates on your term deposits or mortgage terms, so that you have a constantly rolling over set of instruments. Mary Holm from RNZ can explain more in this short podcast segment:

Skip to 9.30 if you want to dig straight into the detail around mortgages, or listen from the start to hear how it works for term deposits too.

Prefer to read? Here's a quick breakdown:

1. Laddering your mortgage means splitting your loan into multiple parts, all on different fixed terms. For example, let's say you have a $400k mortgage. You split this into 4 equal parts of $100k each. The first part goes on a 1-year fixed term, the second part goes on a 2-year fixed term, the third part goes on a 3-year fixed term, and the fourth part goes on a 4-year fixed term. When each part needs to be refixed, you refix them for 4 years.

2. This means you have a constantly circling set of fixed-term loans. Every year, you refix part of your mortgage at a new interest rate. This is in contrast to refixing your whole mortgage at a single interest rate all at once. The idea is that by "laddering", you avoid the risk of having to refix that whole $400k at once, when interest rates might have jumped up a lot since the last time you refixed.

3. Put simply, laddering your debt means you can spread out the risk!

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