Picking interest rates

There are two main types of interest rate options for home loans in NZ:

Fixed Rates

These are usually the cheapest and involve setting a rate for 6 months – 5 years. Most or all of your lending should be on fixed rates (because they’re cheaper).  

Because your rate is fixed, so are your payments, so you can plan ahead and factor your payments into your budget.

If rates go up, you won’t be affected by that until your fixed term ends and you have to choose a new rate. Conversely if rates go down you won’t be able to take advantage of that until your term ends.

You can make changes to fixed rates but if rates go down there will be a “break fee”. Some lenders will let you increase your repayments by a small amount, or make limited lump sum payments, without any break fees.

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Floating Rates

In NZ floating rates are more expensive than fixed so should only be used when needed.  

Floating rates change over time, usually when the Reserve Bank changes the Official Cash Rate. This is the main driver of interest rates in NZ and is used to control inflation.  

The main reasons to use a floating rate are:

• To avoid a break fee, e.g. if you are planning to repay a large amount of lending within 2-3 months.  

• To be able to make lump sum payments e.g. if you have irregular income from bonuses or being self-employed and want to be able to make a larger payment when you have good income.

A bad reason for being on a floating rate is that your fixed term ended and you just didn’t choose a new one. With floating rates around 2% higher than fixed, you’re paying around $2,000/year extra for every $100,000 of home loans. If this sounds familiar give us a call ASAP to get it sorted.

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Revolving Credit or Offset

A special type of floating rate loan is a Revolving Credit or Offset account. There are lots of slightly different types of these loans but their main feature is that they let you put money in and take it out whenever you like, like an overdraft.  

The advantage with these is that you can use savings to reduce your mortgage interest cost, but keep access to your savings in case you need them for any reason. This is often savings left over from purchasing a property (e.g. if you have more deposit than you need), or if you’re saving a lot of money regularly and want to be able to use it to reduce your mortgage.

Picking a fixed rate

Choosing a fixed rate is an important decision. The main questions to consider are:

• How long do you plan to have the loan for? If you’re thinking about repaying it in full, selling, or refinancing, to avoid potential break fees you shouldn’t lock in a fixed term that’s longer than the length of time you plan to have the loan.

• How much certainty of payments do you need? If you can handle ups and downs then you might be better with shorter terms like 1 year, which tend to be more competitive for banks, and have smaller profit margins. If you want a guarantee that your payments won’t go up for a few years then you could look at the longer terms.

• You can split your lending into different portions on different terms if you want to spread the risk.

The other angle we can help with is looking at forecasts and wholesale interest rates to see if any terms are likely to work out better than others. Predicting interest rates perfectly is impossible but we can give you feedback on how the forecasts view the specific rates you are being offered by your bank, to help you make your decision.