Are you considering buying a house in New Zealand? One of the biggest concerns for most Kiwis is getting the lowest mortgage rate possible. Many start by going to the banks offering the lowest interest rates, but often find themselves confused by the complex jargon and lack of clear explanations about how mortgage rates work. This is where we come in!
Below we break down the four main factors that influence mortgage rates in New Zealand. By understanding these factors, you will be better equipped to navigate the mortgage process and get the best rate for your needs.
Factor One: The Official Cash Rate (OCR)
The OCR, or “Official Cash Rate” is determined by the Reserve Bank of New Zealand and directly influences the floating rate. When banks need additional funds for home loans, they can borrow from the Reserve Bank at a rate slightly above the OCR or use funds held on deposit with them. Therefore, when the Reserve Bank lowers the OCR, your interest rates will likely fall as well.
Second factor: your deposit
Your deposit has a significant impact on the type of mortgage you can get, the length of your mortgage and how quickly you can pay it off. First-time home buyers benefit from a minimum deposit of 5-10%. Most home buyers, however, need a deposit of around 20%.
Borrowers should be aware that bank interest rate and cash back specials are best when you borrow 80% or less of the purchase price.
Some banks above 80% will add a small equity fee (a fee that is typically added to the loan) or add a low equity margin (an increase in the interest rate typically available). In any case, your interest rate will be higher if your deposit is low.
Third factor: economic factors
The main influence on rates is inflation. Here in New Zealand, the Reserve Bank has a mandate to keep inflation between 1 and 3%. While inflation has been well above this band for some time, the RBNZ has sought to control it by increasing the OCR. When rates are higher, the cost of borrowing increases and New Zealanders have less disposable income. This helps bring down inflation.
Factor four: fixed or floating
The type of interest rate you choose has a significant impact on your mortgage costs. The two types are:
- Fixed prices: Your interest rate is fixed for a period of 6 months to 5 years. This keeps budgeting stable, but you risk missing out if rates drop and you’re stuck for too long.
- Floating rates: Your interest rate fluctuates as the market changes. Although you benefit from possible rate cuts, you can also risk rate increases. Borrowers have flexibility in repayment structures and options include revolving credit and offset mortgages.
Do you still have questions?
Understanding the real estate market and mortgage jargon can be difficult. If you have any questions or would like to go over anything mentioned above, contact us for a no-obligation chat, we’re here to help.