Over the past few days, we have seen some New Zealand banks reduced their mortgage rates to 2.79%, hitting the lowest in the fixed mortgage interest rate history, while other banks still keep at 2.99%.

Our enquiry phones are getting bombarded with questions like:

“Should I refinance my home loan to another bank that offers a lower mortgage rate?”

“My current interest rate is high, should I break my current loan term and relock it at a lower rate?"

“My loan is coming off its fixed term. Would the mortgage rates drop even further? Should I wait for it or lock it now?"

In this blog, we’ll answer all of your burning questions and help you gain clarify around New Zealand home loan interest rates.

2020 home loan interest rates NZ

Video Timeline

1. My current home loan interest rate is high, should I break my current loan term and re-fix with a lower rate? - 01:22

2. Should I refinance my mortgage to another bank that offers a lower interest rate? - 05:04

3. My home loan is coming off the fixed term and I’ve signed a lock loan agreement, but haven’t rolled over, can I still request a lower interest rate? - 06:30

4. My home loan is coming off the fixed term, should I re-fix my mortgage now? Or wait for the interest rates to drop further? - 07:36

5. How long should I fix my mortgage for in 2020? - 08:45

6. If your new rate is lower than previous rate, how should you set your repayment? - 11:38

My current home loan interest rate is high, should I break my current loan term and re-fix with a lower rate?

With interest rates being as low as they are currently, the question of if I should break my home loan comes up a lot. If you break the fixed term to get a lower interest rate, banks will charge a break cost. This is because they incur a real cost when you break the contract to lock at a lower rate, and they have to pass it to you.

It's simply a calculation of the cost and savings. If you can potentially save more interest costs compared with the break fee, then it would be worth breaking your current fixed term. Break fee is driven by lots of factors such as loan amount, remaining fixed term, the wholesale rates at the time the loan was locked and current rate. We’re happy to do the hard work for you and request your break fees from your bank. This way we can help you to complete the analysis so you can weigh up whether it is worth breaking your fixed term rate to make the most of the current low mortgage rates or whether you’re better to wait until the end of your term to re-fix your home loan.

But from our experience, we’ve seen the break costs we requested for our clients are nearly equivalent to the interest costs they could potentially save. If this is the case, there won’t be much point to breaking your current loan as the saving is not much and you need to come up with the lump sum cash to pay for the break cost. You probably just wait until the end of your term.

However, if you are thinking about borrowing more for buying properties, then you could consider breaking your loan and fix at a lower mortgage rate. Even though the break fee to be charged is nearly the same as the interest saving. Re-fixing at a lower rate can potentially help you increase your borrowing capacity for the future. This is because:

When it comes to calculate your future borrowing capacity banks will consider your existing loan structure such as your current repayment, and your interest rates to. If your interest rate is lower, then from your lender’s perspective, you might have greater borrowing power.

We appreciate you might feel regret not locking with a lower mortgage rate. The truth is, no one can predict accurately every time about the interest rate movement.

On the other hand, if take a look at a bigger picture where the interest rate weighs one side of the equation and how you repay your home loan is equally important. If you can manage your loan repayment well, then it helps you save interest costs in the long run. If say you re-fix your home loan with a lower interest rate, but then you only pay the minimum while you have a lot of cash flow surplus every month. It’s probably not a good idea.

Should I refinance my mortgage to another bank that offers a lower interest rate?

Sometimes, refinancing can help you recover some of the costs because you potentially get cashback, despite the solicitor fee will incur when refinancing your mortgage. On the surface, it seems like a good idea. But there are some pitfalls you need to be aware of:

• Cashback to be clawed back- If you refinance within your cashback period, the bank will reclaim some part of the cashback paid to you. In terms of the period, you can refer to the DOA (Deed of Acceptance) you signed with the bank. In general, the period could be three or four years, depending on the bank you deal with.
• Lose the product features that your current bank brings along – If you refinance, you potentially lose the product features and loan structure that you already have with your existing lender.

Refinancing a mortgage can be complex. Making the right decision takes time, research, and a good amount of forward-planning. If you’re thinking about home loan refinancing, we are happy to help you manage your finances and weigh up all the pros and cons for you.

My home loan is coming off the fixed term and I’ve signed a lock loan agreement, but haven’t rolled over, can I still request a lower interest rate?

Say you’ve signed a lock loan agreement, but your term haven’t rolled over, which means your current loan hasn't expired, and you just booked the rates. But your bank just released a new lower rate, it’s probably worthwhile paying a certain fee to break the lock rate agreement.

Although your bank will charge you a fee when you break the agreement, the fee is a flat fee and generally small. You can consider cancelling the relock agreement. This way can potentially help you save a lot of money.

My home loan is coming off the fixed term, should I re-fix my mortgage now? Or wait for the interest rates to drop further?

In our view, it's quite likely the interest rates would go downwards in the near future. Even some commentators predicted the OCR (Official Cash Rate) might go into negative early next year. A lot of things indicate the rates could drop more. But no one knows how quickly the rates could drop even further. So if you just keep waiting and let your loan on a floating rate, then probably it will cost you more down the track.

We’d suggest, if your fixed term still has at least three weeks until its expiry date, then you can wait a bit and make a decision. But allow for at least two-week time to allow sufficient time to action your re-lock request and avoid leaving it to float.

How long should I fix my mortgage for in 2020?

One year has the best value at the moment

 If your bank hasn’t dropped the rates, we’d say lock your home loan for one year will probably give you the best value because one-year is a short term, and you can re-fix with a potentially lower rate once the one year ends.

Who should consider fixing for more than one year?

If your loan is large or people who believe certainty is very important , then it's best to have a mixture of one year and a longer period fixed term such as 18 months or two years depending on which period is lower. This way allows your loan coming off at a different time. If 18 months is at the same rate at two-year, then go with 18 months and it gives more flexible time to re-fix your mortgage with a lower rate early. Again, how you manage your loan repayment is equally as important as saving interest costs. Here are two worst-case scenarios that you should avoid:

Say you stretch yourself too thin by repaying your loan way beyond the minimum, in case if you want to extend your loan term and reduce the repayments as a result of economic downturn, then your bank will need to reassess your situation. So you may not have room for yourself to make adjustment.

On the other hand, we’ve seen people just pay the minimum, even have interest only on all their loans when they have a lot of surplus cash putting aside. It’s a waste of money because you potentially pay much more interests. When you manage your repayment, you need to take into account your personal situation, and make sure you have a good balance.

If your new rate is lower than previous rate, how should you set your repayment?

Basically, you have two options -- keep paying the same, that means you pay off your loan faster by reducing your loan term. Alternatively, you reduce the repayment because the rate has dropped, so you keep the same loan term, but pay less.

Each approach has its pros and cons. If you reduce the payment, that means you have more cash in hand every month or week, then you can use that extra cash to build some buffer for rainy days like COVID-19, or use that to purchase some essential items.

If you pay the same payment as before, the benefit is obviously - you pay off the loan faster. But you may not have the surplus cash for rainy days, and also potentially will compromise your future borrowing capacity, because your commitment is higher than otherwise.

There is no one size fit all answer, and it really depends on your situation and your goal going forward. This is the time that you really need an expert to help you navigate all the options because your situation could be different from others. We’re happy to help you understand the principle behind these but more importantly, help you adapt your situation.  Read Further: Reserve Bank proposes to remove the LVR restrictions?

Prosperity Finance – here to help 

If you’d like to know how the mortgage rates changes will impact your borrowing power, and whether you can borrow much more than ever, then we are happy to provide you with a personalized solution that helps you unlock the potential, we’re professional mortgage broker and are here to help you. Call us at 09 930 8999 for a no-obligation chat with our adviser.

Read Further:

Do banks take a conservative or aggressive stance on mortgage lending?

Reserve Bank proposes to remove the LVR restrictions?

Top 5 reasons your home loan application is declined and what you need to avoid

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.