Interest Rate Guide

A Guide to Mortgage Interest Rates

Everyone wants a home of their own and mortgage interest rates govern this desire to a large extent. It is the same in New Zealand where one of the hottest topics of discussion and speculation is home loan interest. According to statistics nearly 50 percent of Kiwis have their own house, one of the highest numbers in the world.

Although an important aspect, there is still a lot of confusion about how mortgage rates are calculated and what are the best ways to maximize their use. Here is a list of some pointers that can help you better understand how the mechanism works and what is it that you need to think about before finalizing on something.

Factors that decide mortgage interest rates

  • Home loan rates are directly proportional to deposit rates in banks. The quantity of deposits by customers and the cost that goes into them determine the bank’s affordability of lending out loans to its customers. In simple words, the cost of deposits decides the cost at which money can be lent out as home loans.
  • Global economic and political conditions have a large say in the amount and cost of home loans in New Zealand. This is because banks have to source money from international markets to satisfy the high demand for mortgages. These funds also come at a cost that keeps changing depending on various factors. The most recent big splash of the Ukraine condition and the discord in the Gulf countries has had an impact on home loans in the country. The global financial recession of the last few years reduced the number of loans that were available for people, driving the interest rates higher than usual. This happened because the demand was greater than the supply.
  • International and national bond programmes also impact the cost of home loans. This is because most mortgage periods span a long-term period of over 20 years, and the banks have to gain funding from both national and international sources to be able to provide for such requests. This happens through debt markets and bond programmes. These programmes in the simplest of terms are the interest rates offered by the banks in exchange for money invested for a particular fixed period of time.

Things to consider when going over the available mortgage interest rates

  • OCR or Official Cash Rate is one of the biggest factors that you need to give thought to before taking a home loan. OCR is decided by the Reserve Bank of the country to better manage price rise and other economic transactions and activities in the country. This has a direct bearing on all kinds of borrowing or spending activities. Basically, the lower the OCR the better it is to spend or borrow money while the higher the OCR the better it is to just save.
  • Try and take a loan that is a combination of floating and fixed interest rates. A fixed rate component allows you have some peace of mind due to its certainty while a floating rate component allows to become debt free sooner in case you wish to make chunk payments.
  • There are other finance tools available as well like revolving credit. Revolving credit allows you to draw-down funds when you need to pay for household related commitments and also at the same time lets you make payments in lump sums to become debt free. The interest starts to build only once you start making use of the funds.

In addition to all these factors, having an amount saved for a larger down payment for your desired home can greatly reduce the extra money you would need to shell out for interest and paying back the bank.