When it comes to managing a mortgage, interest rates play a huge role. If you’re a homeowner or planning to buy a home, understanding how interest rates work can save you a lot of money in the long run. In New Zealand, interest rates are set by the Reserve Bank of New Zealand (RBNZ), and any change in these rates can affect how much you pay on your mortgage.
How Interest Rates Work
Interest rates determine how much you pay to borrow money. If you have a mortgage, part of your payment goes toward the loan itself (the principal), and part goes toward interest. When the interest rate goes up, the amount you pay in interest increases, which means your monthly payments could go up. When rates go down, your payments could decrease.
In New Zealand, the Reserve Bank sets the Official Cash Rate (OCR), which influences interest rates across the country. When the OCR rises or falls, it affects the interest rates that banks charge for mortgages.
Recent Interest Rate Changes by the Reserve Bank of New Zealand
Over the past few years, the RBNZ has adjusted interest rates to respond to economic conditions. Recently, New Zealand has seen both rate hikes and cuts, depending on factors such as inflation, employment, and the global economy.
When inflation is high, the Reserve Bank may raise interest rates to slow down spending and bring inflation under control. On the other hand, if the economy is struggling, the RBNZ may cut rates to encourage borrowing and spending. These changes impact mortgage holders, especially those with floating-rate loans or fixed-rate loans nearing the end of their term.
In 2024, the Reserve Bank has implemented several rate changes. For many homeowners, these adjustments have affected their mortgage repayments significantly.
How Do Interest Rate Changes Affect Your Mortgage?
When the Reserve Bank raises interest rates, it increases the cost of borrowing money. If you have a mortgage, this means your repayments may increase, especially if you have a floating-rate mortgage or if your fixed-rate mortgage is coming up for renewal.
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- Floating-rate mortgages: If you’re on a floating rate, your interest rate will move up and down with market rates. When the Reserve Bank raises rates, your lender will likely pass on that increase. This means higher monthly payments for you.
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- Fixed-rate mortgages: If you’re on a fixed-rate mortgage, your payments won’t change until your fixed term ends. However, when you go to refix your mortgage, you may face higher interest rates, which could mean higher repayments.
For example, if you’re paying 3.5% interest on a $500,000 mortgage over 25 years, your monthly payment would be around $2,500. But if your interest rate rises to 5%, your payments could jump to about $2,920. That’s an increase of over $400 a month, which can significantly impact your budget.
Should You Refix or Stick with a Floating Rate?
With fluctuating interest rates, many homeowners wonder whether they should lock in a fixed rate or stay with a floating one. Both options have pros and cons, and the right choice depends on your financial situation and tolerance for risk.
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- Fixed-rate mortgages: Locking in a fixed rate gives you certainty. Your repayments won’t change during the fixed term, even if interest rates rise. This can be helpful if you’re on a tight budget and want to know exactly what you’ll be paying each month. However, if interest rates drop, you won’t benefit from lower repayments until your fixed term ends.
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- Floating-rate mortgages: With a floating rate, your payments can go up or down depending on market conditions. If you think interest rates will fall, a floating rate might save you money in the short term. However, if rates rise, you could face higher repayments.
Many homeowners choose to split their mortgage between fixed and floating rates. This strategy gives you the security of a fixed rate on part of your mortgage, while also allowing you to take advantage of lower rates on the floating portion.
Planning Ahead: What You Can Do
Interest rate changes can be stressful, but there are ways to prepare and minimise their impact on your mortgage.
Review your budget: If interest rates rise, you’ll need to make sure your budget can handle higher mortgage repayments. Cutting unnecessary expenses or increasing your income can help you stay on track.
Refinance or refix your mortgage: If you’re worried about rising rates, consider locking in a fixed rate now. Talk to your lender or mortgage advisor to see if refinancing could save you money.
Make extra repayments: If your budget allows, try making extra repayments on your mortgage. This can reduce the amount of interest you’ll pay over the life of your loan and give you more breathing room if rates rise.
Keep an eye on the market: Stay informed about interest rate trends and predictions from the RBNZ. This will help you make better decisions about your mortgage.
Get professional advice: If you’re unsure about what to do, consult a mortgage advisor. They can offer personalised advice based on your situation and help you navigate interest rate changes.
The Long-Term Impact of Interest Rates on Homeownership
Over the life of your mortgage, interest rates will likely rise and fall multiple times. These changes can add up over time, affecting how much you pay overall for your home. Keeping an eye on interest rates and adjusting your mortgage strategy can save you thousands of dollars in the long run.
For example, if you’re able to lock in a low rate when interest rates are down, you could save significantly on interest payments over several years. On the flip side, if you don’t plan ahead and rates rise, you could end up paying much more than you anticipated.
Conclusion
Interest rate changes have a direct impact on your mortgage repayments. Whether you’re on a floating rate or a fixed-rate mortgage, it’s important to stay informed and prepared for any changes. By reviewing your budget, refinancing when necessary, and seeking professional advice, you can minimise the impact of rising interest rates and keep your mortgage under control.
If you have any questions about how interest rate changes might affect your mortgage, don’t hesitate to reach out to Andre, your mortgage advisor. He can help you explore your options and make the best decision for your financial situation.
