In New Zealand, it’s fair to say we have a bit of a fixation with mortgage rates.
Everywhere you go, it seems (whether it’s catching up with family or friends, or even at work) you get the inevitable conversation about what rate you’re currently on and where rates might be going next.
And as borrowers, a lot of us tend to base our decisions almost entirely on what’s going to get us the “best” rate—whether it’s choosing the lender we go with, or the term we fix for.
But, as I often tell my clients, the “best” interest rate isn’t the most important thing to consider when it comes to your mortgage, particularly in a falling rate environment like the one we’re in now.
So, what do I mean when I say the “best” interest rate is irrelevant?
To be clear, I’m not suggesting that interest rates aren’t important. At the end of the day, the amount of interest you’ll pay over the course of a 30-year mortgage is massive, so of course rates matter.
But here’s why chasing the “best” interest rate isn’t necessarily a good strategy—and what you should do instead.
Why the “best” rate shouldn’t determine the lender you go with
The nature of New Zealand’s banking sector means that, at any given time, the difference between the rate you’ll get with one lender, versus what you could get with another, usually only comes down to a very small margin.
Still, I’ve seen plenty of clients lose sleep over the fact that they’re locked in with a bank where rates are perhaps 0.06% higher than what’s on offer elsewhere, and borrowers prepared to go through the whole refinancing process just to get a slightly cheaper short-term rate.
The problem with chasing the “best” rate from lender to lender is that once you roll off that initial fixed term with a bank, there’s no guarantee they’ll still be offering the most competitive rates in market.
It might feel like they’re trying to lure you in with a good deal, and then lock you in for the length of your cash back clawback period—but that’s not the case. It’s simply that banks’ lending appetites are always changing, as are their margins and targets, and all of that has a direct impact on the rates they offer in market.
When it comes to choosing a lender, you want to be looking at the big picture. Each bank has its own unique policies, and suite of products, and (depending on your personal situation) some lenders will probably be better placed to cater to your needs than others.
The main consideration should be about finding the right bank for you and your situation, not just chasing the “best” interest rate.
Why the “best” rate shouldn’t determine how long you fix for (particularly in a falling rate environment)
On 14th August, the Reserve Bank cut the Official Cash Rate by 0.25%—its first reduction since 2020—marking the start of a gradual easing of interest rates over the coming months.
Based on forecasts from the RBNZ (and a number of bank economists) the expectation from here is that we’re in for significant rate cuts over the remainder of this year, and throughout 2025. It’s good news for borrowers, meaning much needed relief is on the horizon, and it’s good news for aspiring homeowners, with lower rates set to greatly improve their affordability.
But the question of how long to fix when rates are tracking downwards—well, it can be a tricky one to answer.
Right now, we’re seeing longer-term rates sitting considerably lower than shorter-term rates. It’s pretty tempting stuff for borrowers, who after the pain of the last few years, are keen for all the rate relief they can get.
The problem with fixing long-term in a falling rate environment is that you don’t get the benefit of further rate falls as they start to come through. And then, when rates do eventually drop below the level you’ve fixed at, you’ll either have to stick it out for the remainder of your term, or—if you decide to break your loan early (such as if you need to sell your house)—face being hit with hefty break fees.
(And in fact, the recommendation we’re making to most borrowers at the moment is to fix shorter-term, between six months and a year, to allow you to ride rates down as further OCR cuts come through.)
The most important thing when choosing your term—particularly in a falling rate environment—is making sure the one you go for is best suited to your situation, and that you understand the risks involved before you lock in. You need to be comfortable with your decision.
For example, some borrowers may be happy to go longer term, as this fits in with their budget and plan (i.e. they have no intention to sell in the coming five years).
Some may not be comfortable paying the higher six-month rate and would instead like to opt for 18 months—giving them a bit more capacity in their budget, without locking them in for years at a time.
Moral of the story: The single most important thing you can do when working out your mortgage strategy is get expert advice
As mortgage advisers, our job is try to understand your needs and financials goals as best we can—and to take all of that into consideration when recommending the mortgage structure that’s going to work best for you.
We’ll lay out all your options for you to consider, and talk you through any questions, concerns or associated risks.
It’s not the sort of advice you can get from friends at a BBQ, or family at a dinner party (unless you happen to have a mortgage adviser in the family, that is).
You need to get good advice you can trust from someone that understands the industry, the banks and your situation. That is far more important than interest rates, especially in a falling rate environment like the one we’re currently in.
If you'd like to speak to one of our team for some guidance, and to help you understand your options, get in touch for a chat today.
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