7 Things Home Buyers Need To Know About Mortgage Interest Rates in NZ In 2021

Want to know what interest rates the banks are offering right now? Check out the table below

Last Updated: 05/10/21. Rates Updated Daily

Peter Norris

Peter Norris

Mortgage broker for over 10 years, property investor and Managing Director at Catalyst Financial
Chapter 01

What Are The Current Interest Rates In NZ?

Chapter 02

How Do I Choose The Right Mortgage Interest Rate For Me?

Buying a property is usually the most expensive purchase a person will make in their life.

Given the average price of a Kiwi property these days, it’s likely you don’t have $1.2 million sitting in the bank gathering dust.

So, in order to buy your first home, or your next investment property, you’ll need to ask the bank to lend you the money. The sum you are lent is called a mortgage.

Interest rates NZ - Choose Your Rates Carefully

All mortgages come with interest rates, or what the bank charges you for loaning the money.

If you are looking at getting a mortgage you’re more than likely about to start a keen obsession with interest rates. What are they? How are they behaving? Can I predict what rates will be in 3 years’ time? What bank offers the best interest rates?

Interest Rates NZ – Cost Of Mortgage

In this article we’ll take you through 7 essential things to consider when you are deciding on your interest rate.

Please Note: Here’s the thing with interest rates; they change all the time and are influenced by a myriad of different things. So, what’s relevant today may be completely out of date in 6 months.

We’ll do our best with current figures and market trends in this article. But, to check out the latest interest rates, look at the table above (updated daily).

Fixed Or Floating Rate?

#1 Think About … Whether You Want A Fixed Or Floating Rate

Let’s start off by discussing fixed and floating interest rates because as part of the process of getting a mortgage, you have to choose one.

You’re likely to get advice from your mortgage broker on which one, but it’s important to have an idea for yourself about what that advice is.


What Is A Fixed Rate?

A fixed-rate mortgage “locks in” a specific rate for a set period of time. This is anywhere from 6 months to 10 years, although most banks will only go to 5 years.

This loan offers both you and the bank a bit of financial certainty, knowing exactly how much your loan repayments will be for that period of time.

For instance, let’s say you have a $500,000 mortgage that you’re paying off over 30 years. You decide to fix your mortgage for one year at a 3% interest rate. This means that your repayments will be $486 per week.

Interest Rates NZ

Even if the interest rates the bank offers to new customers go up (or down), the amount that you pay remains exactly the same for that year.

At the end of that year you’ll then be able to re-fix your mortgage at the interest rates available at the time.

The interest rates you are able to get differ depending on how long you want to fix for and, of course, which bank you are talking to.

Interest Rates NZ

For example, at the time of writing, BNZ are currently offering 2.85% on a 1-year fixed term, 3.25% on a 2-year fixed rate, and 3.99% on a 5-year fixed rate.

However, an important note to make with fixed rates is, if you repay a fixed rate early (like if you sell the house) you may end up having to pay early repayment fees.

Interest Rates NZ - Pros + Cons




What Is A Floating Rate?

Like the name suggests, a floating rate means the rate can go up or down throughout the loan duration with the natural ebb and flow of the market.

So, you don’t get the same certainty of a consistent repayment amount.

The downside of this is the repayment you need to make this month may be different from the payment you need to make next month. This provides uncertainty, which most New Zealanders don’t like.

However, there is more flexibility to pay your loan off faster, meaning you could save a lot of interest if you pay your loan down aggressively.

Interest Rates NZ - Floating




So, Which Should I Use? Fixed Or Floating?

Most financial advisors will suggest a mix of the two. Many borrowers will fix a large portion of their mortgage so they know what their repayment will be week to week, or month to month.

But they may also leave a portion of the mortgage (e.g. 5-10%) on floating. This means if you want to make additional payments to their mortgage you can do that without paying early repayment fees.

To do this, many Kiwis will use a revolving credit or offset facility.

Interest Rates NZ - Fixed
Different Rate Offers

#2 Think About … Shopping Around For The Bank With the Best Interest Rate

The bank with the lowest interest rates will change over time – and are not always easy to compare.

As mentioned, at the time of writing BNZ are currently offering 2.85% on a 1-year fixed term, 3.25% on a 2-year fixed rate, and 3.99% on a 5-year fixed rate.

On the other hand, KiwiBank are offering 2.95% on a 1-year fixed term, 3.15% on a 2-year fixed rate, and 4.19% on a 5-year rate.

Interest Rates NZ - Lowest Rate

This means that BNZ is currently advertising lower 1 and 5-year rates than KiwiBank. But KiwiBank is offering a lower 2-year rate.

You’ve also got to remember you can also negotiate your interest rate with a bank (more on that below).

Just because KiwiBank is advertising a higher 1-year rate than BNZ, that doesn’t mean you couldn’t get a lower rate from KiwiBank.

This is where using a mortgage broker is crucial. Because mortgage brokers negotiate with banks every day, they know the sort of interest rates that are offered by the different banks to different borrowers.

So they are in the best position to know where to find a great interest rate at any given time.

2022 Forecasts

#3 Think About … Are Interest Rates Going Up Or Down In 2022?

 

Economists believe interest rates are on the rise.

Interest rates plummeted in the midst of the Covid-19 pandemic. But now they are starting to trend upwards. In other words, interest rates are starting to return to a more “normal level”.

Interest Rates NZ - Super-low

One measure investors often look to when considering where interest rates might head in the future is the Official Cash Rate (the OCR).

This is an interest rate the banks pay or receive from the Reserve Bank when holding or borrowing money from the central bank.

Often when the OCR increases, short-term interest rates (like the 1-year rate) will start to rise. When the OCR decreases, those interest rates tend to decline.

Between September 2021 and December 2022, the Reserve Bank is forecasting an OCR rise from 0.3% to 1.6%.

Last time the OCR hovered around that rate, the 1-year mortgage interest rate was between 3.8% - 4%. In other words, we can broadly expect interest rates to rise in 2022.

Fixed Terms

#4 Think About … Whether You Should Fix For a 1 or 5 Year Rate.

The decision on how long to fix your loan depends on your individual situation.

More conservative property owners tend to fix their rate for a longer time period. That’s so they have certainty of what their repayments will be over time.

Alternatively, other property owners who are comfortable with more variation will often fix for the short term.

Interest Rates NZ - Conservative

Your decision also depends on your view of the market. If you think interest rates are going down, you’ll tend to fix for the short term because then when it’s time to re-fix you can lock in a lower rate.

If you think interest rates are on the rise, then you’ll tend to lock in for the long term. That means that you think fixing for longer will mean not paying as much in interest over the long term.


Case Study Of When It’s The Right and Wrong Time To Fix

Let’s use a dramatic example to illustrate the point of what can happen. Let’s say interest rates are fixed at 2.5% for one year and 4% for 5 years.

If you fix for the one-year rate, then you’ll pay a lower interest rate. Great.

But then, let’s say interest rates rise after 1 year to the point where the 1-year rate is 5%. And let’s say that lasts for the next 4 years.

The two options were –

  • Fix for the one year at 2.5% and then 5% for the next 4 years.
  • Fix for five years at 4%.

In scenario #1 you paid an average interest rate of 4.5% over 5 years. In scenario 2 you paid an average of 4% interest over that same period.

If you fixed for 5 years, you’d probably feel pretty good about yourself. Your interest costs are lower than if you’d fixed for the short term.

But now, let’s say it’s the same situation, but interest rates didn’t increase at all over the next 12 months.

In that case, people who fixed for the short term will feel smug. That’s because, in this example, people who fixed on the one-year rate pay an average of 2.5%, whereas those on the longer term rate pay an average of 4% per year.

Real World

#5 Think About ... What’s Happening In The Real World With Interest Rates And How It Can Affect You

In the real world, up until the last six months, most lenders were choosing to fix for a year because interest rates have been trending downwards.

However, now because it looks like interest rates are trending upwards, fixing for longer is becoming more popular.

Peter says the question of whether to fix for 3 or 5 years really comes down to how high you think the market is going to send interest rates.

Interest Rates NZ - Short Term

But you also need to think about your personal plans for selling the property.

For example, how long do you plan to own the property?

If you were planning on selling the property in a few years you wouldn’t fix it long term. You would probably go for a 1 or 2-year fixed rate.

That’s because if you fix for 5 years and then sell the property in 2, you’ll potentially have to pay a large break fee.

Many investors think “I’ll just go for the cheapest interest rate.” Right now, that’s the one-year rate.

But the main takeaway here is to just be aware that the cheapest interest rate right now may not be the best one for you.


What Makes Interest Rates Go Up and Down?

Interest rates are influenced by a raft of different things, but the OCR (Official Cash Rate) is the most talked about.

Interest Rates NZ - OCR

The OCR influences the price of borrowing money in New Zealand and provides the Reserve Bank with a means of influencing the level of spending.

How so? Well, low interest rates tend to boost the economy by encouraging everyone to buy stuff, whereas higher rates tend to slow the economy back down.

Think about it: if you are guaranteed low interest rates then your home loan repayments will go down. That leaves you with more money to spend on other stuff. This stimulates the economy.

Interest Rates NZ - Reserve Bank

If interest rates are higher, then eventually your mortgage repayment will go up. You’ll then have less money to spend.

It also influences the amount of spending by making borrowing more or less expensive. When interest rates are low, you’re more tempted to go out and get that contract signed to purchase a property.

But it might make you put off the same purchase if interest rates were really high.


So, are the up and downward trends predictable?

Well, not really.

Yes, there are certain parts you can predict, but every single economist had their predictions go wrong last year when Covid hit.

So, it’s possible but it’s not easy.



How Does The Interest Rate Impact My Mortgage Payment?

Interest rates greatly affect the repayments of your mortgage. The higher the interest rate, the higher the repayments.

Interest Rates NZ - Cost Of Mortgage

And minor changes to your rate can have a costly impact on the amount you are paying back.

And we mean, costly.

For example, a rise in interest rate from 2% to 3% increases your repayments by 50% on an interest-only mortgage.

Let’s say that you’ve taken out a $500k mortgage and your interest rate is 2%. That’s $10,000 a year in repayments.

Increase that interest rate to 3% – your mortgage repayments go up to $15k. That’s an increase of $5,000 a year you need to pay.

If you’re on a principal and interest mortgage, then calculating the difference in your repayments is harder. That’s because not all of your mortgage repayment goes towards interest.

So here’s a quick table to see how a change in interest rate will increase your mortgage repayments –

Interest Rates NZ - Repayments
Negotiating Rates

#6 Think About … Possibly Negotiating Your Interest Rate?

 

In the good old days of property investment, purchasers would negotiate hard with the bank and negotiate the interest rate down.

This happens less today. The banks are much more likely to stick to their advertised rates.

But that doesn’t mean that some form of negotiation is impossible.

Interest Rates NZ - Negotiating your interest rate

But the key is that you – or your mortgage broker – need to ask. The best way to do this is to either pick up the phone or get in front of someone.

You want to be firm, but not threatening either.

Soften your request from: “Give me this rate or I’ll walk”, to statements like: “I really like this offer but I’ve seen this rate somewhere else. I’d really like to stay with your bank, so can you match it?” or something similar.

You can get a mortgage broker to do your negotiating for you, and they might have a bit more experience in the art of peaceful negotiation.

But remember, the rate you can get through a broker now has to be matched by the bank, vice versa so there is no incentive to use a bank.

Higher Interest Rates

#7 Think About … When A Higher-Than-What’s-Advertised Interest Rate Might Apply to You?

Although we’ve just said that banks stick to the advertised rate, it’s important to explain the two instances where you might end up paying more.


A Commercial Lender

Let’s say you’re a property investor, and your goal of an empire is expanding from just one or two properties into a sizeable portfolio.

Interest Rates NZ - Commercial Rates

When this happens, the banks typically will look at shifting you from the bog-standard residential lending category and place you in the commercial section.

Think about it: most property investors with an average of 3 to 4 properties are deploying more working capital than most small businesses in New Zealand.

The bar of what constitutes you as a now “commercial” lender isn’t set in stone, but contributing factors to push you towards the threshold are: How much money you are loaning from the bank; how many properties you own; and the amount of income you are generating from these properties.

In terms of interest rates, fixed rates are typically higher than residential loans, but commercial floating rates are somewhat similar.



Low Equity Margin

The second instance, where you will pay higher-than-advertised interest rates, is when you are a low equity margin customer.

Let’s say, for example, you are a first home buyer and have less than the standard 20% deposit. In this instance your home loan will be classified as a “high LVR” loan.

Low equity margins are an extra bit of interest your bank charges when you get a loan with less than a 20% deposit.

Yes, by extra we mean on top of and added to the rates you see advertised.

So, while a lower deposit may help you get you on the ladder sooner, it does incur some costs.

These margins typically range from 0.25% up to 1.5%, depending on how small your deposit is.

But as a general rule of thumb, the lower your deposit, the higher your interest rate will be.

The reason for this is banks face higher risk and cost when they offer low equity loans, so they pass both of these on to the borrower in the form of additional chargers.

And banks want to make sure they have a little “insurance” of their own before they throw their hand in with a first, “untested” lender.

Please note: This is different to a low equity fee which is a one-off charge added to your mortgage.

Conclusion

Final Thoughts...

In conclusion, there is a lot to think about when it comes to interest rates. And whatever interest rate you choose is going to greatly affect the amount and certainty of your mortgage repayments. So, it’s a massive consideration when embarking on a house purchase.

However, as this article has discussed, it’s not always a straightforward decision when mortgage rates are consistently changing, and different banks are offering different rates for different people.

So, while choosing the right one for your situation is paramount, remember to also let your decision be influenced by real-world factors and current trends.

Peter Norris

Peter Norris

Peter Norris is the Managing Director at Catalyst Financial – a mortgage advisory firm, which is fully-owned by Opes Partners. He is a mortgage adviser and has over 10 years experience helping investors and home buyers get finance for their properties. He's a frequent writer for Informed Investor Magazine and has written for Property Investor Magazine.