Over the past year, interest rates in New Zealand have eased, creating a valuable opportunity for homeowners to get ahead. While the headlines often focus on what this means for first home buyers, the real potential lies with existing homeowners who can use lower rates to shorten their loan term and save tens or even hundreds of thousands in interest over time.
If you look back 12-months, average interest rates were sitting around 7 percent for six-months, 6.5 percent for one-year and 6.3 percent for two-year rates. Today, the picture looks quite different. Average one- and two-year fixed rates have fallen into the mid 4 per cent range, helped by the Reserve Bank’s steady cuts to the Official Cash Rate (OCR) over the last year. And with the OCR being cut by 50 basis points in its October announcement and with further cuts still expected in November, it is our expectation that rates may fall even further. In practical terms, this means that borrowing has become cheaper, and that means opportunity for those who act.
When interest rates fall, many people think about how this will allow them to pay less each month. But there’s another option that can make a much bigger difference over time: keeping your repayments the same and using the lower rate to reduce your loan term.
Here’s what that might look like in practice…
Let’s look at Sarah and Matt. They have a $600,000 mortgage spread over 30 years at 6.5 percent, meaning they are paying about $3,800 per month. Refinancing to 4.5 per cent while keeping payments at $3,800 could cut the term to around 22 years, saving roughly eight years and more than $120,000 in interest*.
Then there’s Sam. Sam has an $800,000 loan spread across 30 years on an interest rate of 5.99 percent, which makes his fortnightly repayments $2,210. If Tom refixed for one-year rate of 4.49 percent but kept his fortnightly repayments the same, he could save over $232,000 in interest repayments and see the loan repaid more than eight years earlier!*
* These examples are for illustration only. Actual savings depend on your loan size, structure and personal circumstances.
Interest rate cycles move in phases, and after several years of increases, the current period of easing provides a chance to reassess your mortgage strategy. If you do nothing, your rate will simply reset at renewal and your payments will continue much as they are. But by making an active choice to keep payments higher while rates are lower, you can turn a temporary change into a long-term advantage.
Falling interest rates offer can offer you more than short-term relief. Rate cuts can give you a chance to accelerate progress and build financial resilience. By using this environment to pay down more principal, you can bring your goals closer and strengthen your long-term position. The key is to make a deliberate choice rather than letting the opportunity pass by.
Interested to see what the impact of recent rate cuts might have on your mortgage? Book a free review with one of our advisers and they can let you know. Plus, for every review completed this month, you’ll also be entered into the draw to win $5,000 cash. That’s money you can use to spend, save or invest as you like! Click here to book your complimentary review.
The content of this article should not be taken as financial advice, or a recommendation of any financial product. These insights are based on current economic commentary, market pricing for interest rates, and our personal opinion. Threefold is not liable or responsible for any information, omissions, or errors present.