Make the Most of Current Mortgage Interest Rates

The return of first home buyers and property investors

The New Zealand mortgage interest environment is as dynamic as ever.

Investors and owner-occupiers are returning to the housing market, with first home buyers (FHBs) continuing to show strong activity.

Meanwhile, property sale numbers have broadly returned to normal levels across New Zealand. This is beginning to ease stock levels, with some vendors actively withdrawing listings. It could be that this leads to moderate price increases, though any capital gains are likely to be modest over the short-term due to the New Zealand economic environment.

More cuts to interest rates could be on the cards after unemployment was recently reported at the highest level since 2020.

Interest Rates, Where Next?

Predicting mortgage rates can be a mugs game.

On one hand, Cotality Chief Property Economist Kelvin Davidson said mortgage rates were probably at or near the bottom across many of the fixed-rate terms.

But others have highlighted how they could fall a little further, noting more rate cuts are occurring offshore.

Nobody knows what the future holds, and in a small and isolated country like New Zealand all it takes is one natural disaster, or other shock, and all bets are off.

Bank Switching

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 close to their advertised rates.

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

A record number of mortgage holders switched banks recently, data shows. Refinancing activity   has hit its highest level since data collection began in 2017, according to the latest analysis from Kelvin Davidson, Chief Property Economist at Cotality NZ.

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

End of Fixed Term: What to Do About Higher Rates

For existing homeowners and property investors coming to the end of a fixed term on a current mortgage, many are refinancing now to a different bank (that is to say, changing banks, especially when incentivised by a cash contribution).

• Careful evaluation of the pros and cons of refinancing needs to occur before changing banks, weighing up all likely costs - such as legal fees and termination fees - against all benefits
• Plenty of research also needs to occur: plenty of banks try and entice new business with great deals such as competitive interest rates, or a cash-back contribution

Just like any other financial matter, what to do depends on personal circumstances, attitude towards the lending market, and aims, including what you want to do with any given property over the next few years.

The rise in switching is likely being driven by a combination of factors: increased engagement with mortgage advisers, growing borrower awareness of competitive loan offers, and banks continuing to offer attractive cashbacks.

The current environment, with nearly 14% of loans on floating rates and another 39% fixed but due to roll off by the end of 2025, has left a significant number of borrowers well positioned to switch lenders without incurring break fees.

This is where using a mortgage broker, including the lending team here at Become Wealth, is crucial.

Related material:

• ‍Should you refinance your mortgage?
• Mistakes to avoid when you already have a mortgage
• Pros versus cons of making extra mortgage payments
• How to pay of your mortgage sooner

Fixed or Floating?

Current floating rates are relatively high, so are usually only suitable for borrowers who want to be able to pay a lump sum off their mortgage or make extra payments without penalty.  

Fixed rates are not as attractive as we want them to be, however they are still lower than the floating rate. They offer people more certainty and ability to manage their cashflow better.

Fixing for some of the longer mortgage terms provides interest rate certainty for the next few years, but at a significantly higher cost than short-term rates. Many people are locking in a two- or three-year mortgage term for better certainty, however, fixing for this period may mean locking in rates at the 'top of the interest rate cycle', and could lead to regrets if interest rates were to fall during this time!

Sometimes, a combination of both is a way to go. One tactic is to leave a part of the mortgage (such as 5-10%) on floating, then, if you want to make extra payments you can do that without paying early repayment fees. This could be if you receive an unexpected windfall, bonus, commission, or similar. To do this, many Kiwis will use a revolving credit or offset facility.

How Long Should You Fix Your Mortgage For?

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 one-year interest rate every year. No matter what. Over the last 20 years that would have given you the lowest rate on average, though over the last five or so years it hasn’t!

Such a simple plan isn’t going to be the right fit for everyone.

You may not be able to afford a higher one-year rate, you may need more certainty, or you may have firm views on where you think interest rates will head in the future.

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 five years.

Non-Bank Lenders

In years gone by, non-bank lenders were a bit like the wild west. Nowadays, this part of the financial services community is far more professional.

By way of comparison, banks tend to have lower interest rates but tighter lending criteria when compared with non-bank lenders. So it’s harder to get a mortgage approved at a bank.

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

This can work well for:

• The self-employed and small business owners,
• Borrowers with bad credit,
• Overseas investors,
• Investors with large portfolios, and
• Anyone who might otherwise struggle to get a mortgage from a bank.

But non-bank lenders also charge higher interest rates.

A common approach is to use a non-bank lender initially, then after a couple of years change to a mainstream bank. The aim during the couple of years is for the financial situation of the lender to become more appealing to the bank, including by a build up in equity in the property (hopefully!).

Your Next Steps to Make the Most of Current Mortgage Rates

The mortgage market is presently dynamic right now. Banks and non-bank lenders are jostling for market share, and many are keeping a close eye on moves in value of the property market.

This creates opportunities and challenges for anyone with a mortgage, or about to have one.

Your financial freedom could be a video call away. For a complementary initial chat with a trained professional about getting the most from your mortgage, get in touch today.