We’ve been on an interest rate rollercoaster recently. Back in 2021, one-year fixed rates averaged just 2.2%, then by early 2024 they had rapidly increased to 7.35%, according to interest.co.nz.
If you’re a homeowner in New Zealand, chances are these rate increases hurt your back pocket, but luckily it looks like the tide has turned. Here are a few ideas on how Kiwis can make the most of falling interest rates.
Keep repayments the same to pay off your loan faster
If your mortgage term is up and you are lucky enough to renew at a new and lower interest rate, keeping your repayment amount the same after interest rates drop is one of the smartest and simplest ways to benefit from your decreased rate. You can set your mortgage repayments to be exactly the same amount every month as what they were, but your loan term will decrease, potentially saving you thousands of dollars in interest repayments (or more).
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Original loan
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Option one (repayments reduced)
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Option two (repayments the same)
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Loan amount
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$350,000
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$350,000
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$350,000
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Interest rate
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7%
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5%
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5%
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|
Loan term
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30
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30
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20
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Monthly repayments
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$2,329
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$1,879
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$2,329
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|
Total loan cost
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$838,281
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$676,395
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$551,126
|
|
Monthly repayment difference
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-
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$450
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$0
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Total loan cost difference
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-
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$161,886
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$287,155
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In the above example, we’ve shown the numbers behind two options when you refix your mortgage from 7% to 5% as an example. If you take option one and reduce your repayment, your mortgage repayments will be $450 per month less, and your total loan cost will be $161,886 less. Your loan term would still be 30 years however.
But if you keep your loan repayments the same as when you had a higher interest rate, your loan term will decrease from 30 to 20 years. That is life changing money.
Look at the cost of breaking your fixed rate
If you fixed your home loan back when interest rates were peaking in 2024, you might be kicking yourself right now. In that case it may be worth checking the cost of breaking your fixed rate against possible savings.
To do this, simply contact your bank or mortgage broker and enquire about the costs of refixing and current interest rates. Then compare the cost to savings you’ll receive (and the time and cost it’ll take to complete the refix).
If you need a hand doing the sums, ask your bank or mortgage broker to help. Please note: In most cases, it's not worth breaking a fixed rate as the costs are too high, but it's always worth checking!
Think about what fixed rate options are right for you
When interest rates drop most homeowners won’t benefit right away as they need to wait for their fixed terms to run out, then refix onto lower rates (if available).
Right now (4 Feb 2025) one and three year rates are all fairly similar. Two year rates are a bit lower, while six month and floating rates are higher.
Get financial advice
Before you make any decisions regarding your mortgage it’s always best to get financial advice. You can speak to your lender or a mortgage broker for help figuring out what’s right for you and your mortgage.
Read more about financial advice and how to find and access it.
Disclaimer:
This ‘What should I do when my interest rate starts decreasing’ blog is general information only. The views and opinions expressed do not necessarily reflect those of the FSC. It is not intended to constitute legal or financial advice and does not take your individual circumstances and financial situation into account. We encourage you to seek assistance from a trusted financial adviser, legal or other professional advice.
The names of any third parties are additional resources that you access at your own risk and the FSC takes no responsibility for any third-party content.
The FSC and its employees make no express or implied representations or give any warranties regarding this blog, and we accept no responsibility for any loss, damage, cost or expense (whether direct or indirect) incurred by you as a result of any error, omission or misrepresentation in this blog.
February 2025.
