More from Opes Partners:

• Interest rate predictions - Where are interest rates heading? (Article)
• Which interest rate should I choose? (Article)
• What are the latest interest rate changes from the main banks? (Article)

#1 Should I choose a fixed or floating interest rate?

When you choose an interest rate you can either choose a fixed or a floating rate. You should get advice from your mortgage broker about which one to choose.

But it’s important to have an idea for yourself too.

I had this conversation with an investor recently. They were weighing up the 1-year rate and the floating rate. The average floating rate stood at 8.55%, while the average 1-year fixed rate was 7.33%.

Both are high interest rates.

On the one hand, the investor felt the 1-year fixed rate was cheaper and more stable. She knew exactly what her mortgage payments would be for the next year. But if market interest rates dropped in the next year, she’d miss out on potential savings.

If she chose the floating rate she'd have to pay a higher rate (+1.22%). But she had flexibility to take advantage of lower interest rates ... if they come up. So she could save a substantial amount of interest over time.

Most financial advisers will suggest a mix of the two.

I suggested this investor fix a large part of her mortgage, so she knew what her repayments will be.

But she should also leave a part of the mortgage (e.g. 5-10%) on floating. If you want to make extra payments you can do that without paying early repayment fees.

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

Fixed versus floating? Which interest rate is right for me?

Most financial advisers will suggest a mix of the two.

Many borrowers fix a large part of their mortgage so they know what their repayment will be.

But they may also leave a part of the mortgage (e.g. 5-10%) on floating. If you want to make extra payments you can do that without paying early repayment fees.

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

Right now, interest rates are high. So investors are always asking me: “What’s the best interest rate?”

And they’ll sometimes look at me sideways when I suggest taking a higher 1-year rate over the cheaper 5-year rate.

But it’s not about choosing the lowest interest rate. The rate you pick depends on where you think interest rates will go. More below.

Sure, the longer term interest rate may be the cheapest today. But in a few years you might find you're locked in to an expensive interest rate.

The key message is that banks offer different rates depending on how long you fix for.

You may also be able to negotiate to get a cheaper interest rate (more on that below).

This is where using a mortgage broker is crucial.

#3 Can I negotiate a better interest rate?

In the good old days, borrowers would negotiate hard to negotiate the interest rate.

This happens less today.

The banks are much more likely to stick to (or close to) their advertised rates.

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

For instance, let’s say I’m about to re-fix my mortgage.

I'm currently with ASB (offering ~6.8%), but I can see BNZ across the road has a better offer (~6.5%).

If you or your broker asks for a discount, ASB may give you an interest rate closer to BNZ's. 

It doesn't always happen. But, often a main bank with a higher interest rate will match another main bank's rate when asked.

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

Be firm, but not threatening.

Don't say something like: “Give me this rate or I’ll walk.”

Instead say something 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?”

You can get a mortgage broker to do your negotiating for you. Since they will usually have more experience with the banks, they may get you a better offer.

Should I fix my interest rate for 1, 2, or 5 years?

This is something I discuss with all the investors I organise mortgages for. How long you fix your interest rate for depends on 2 things:

• Your own interest rate forecasts and predictions, and
• Your situation

Generally, more conservative property owners fix their rates for longer. That's so they have certainty of what their repayments will be over time.

Property owners who are comfortable with variation will fix for shorter.

One strategy often used by many investors is to choose the 1-year interest rate every year. No matter what. Many of the investors I work with do this. Over the last 20 years that would have given you the lowest rate on average.

But this isn’t going to be the right fit for everyone.

You may not be able to afford a higher 1-year rate. It also depends where you think interest rates will head in the future.

You can use this graph to see how interest rates have changed over the past 20+ years:

If you think interest rates are going up, you’ll tend to fix for longer. Because then you can keep the current low rate, even as other borrowers pay more in interest.

You might pay a little more in interest today, but you could save money over the longer term.

But if you think interest rates are about to fall you're less likely to lock in for longer.

You don’t want to take a lower rate today only to be stuck with a high rate for the next 5 years.

#5 What’s the difference between special and standard interest rates in NZ?

Although banks usually stick to the advertised rate, sometimes you might not be able to get those advertised rates. 

That's because they are called "special rates". They apply to most mortgage borrowers. But not to everyone. 

You need to have at least a 20% deposit to get those rates. If you have a smaller deposit, you'll need to pay the standard rate, which is higher. And you may also have to pay an extra margin (more on this below). 
 

For example, here is a comparison between BNZ's current special and standard interest rates:

There are two main scenarios where borrowers may have to pay even higher interest rates. Use the accordions to dig into the detail – 

#6 What’s the difference between non-bank and bank interest rates?

You can also choose whether to get your mortgage from a bank or a non-bank lender.

Banks tend to have lower interest rates but tighter lending criteria. So it’s harder to get a mortgage approved.

So, if you can’t get a mortgage from a bank, you might decide to use a non-bank lender.

This can work well for:

• business owners,
• borrowers with bad credit,
• investors with large portfolios,
• and anyone who struggles to get a mortgage from a bank

But non-bank lenders also charge higher interest rates.

For instance, here is a comparison between Westpac (a bank) and Resimac (a non-bank lender):

Which interest rate should I take? 

There is a lot to think about when it comes to choosing your interest rate. 

Your choice will significantly impact your mortgage repayment. 

But, as this article has shown, it’s not always a straightforward decision. That's why borrowers should talk to a mortgage broker to help choose the right interest rate for them.

Not sure where to start? Use our Interest Rate Calculator to see which rate might work best for you.