6 things you need to know about mortgage interest rates

6 things you need to know about mortgage interest rates

Home loan interest rates are one of the most talked about topics in property with Kiwis having longed aspire to own their slice of heaven. Statistics New Zealand figures from last year’s census show 49.8% of us live in a home we own, among the highest in the world, and 44.5% of the homes we own are the standard three bedroom ‘castle’.

Demistifying interest rates

Interest rates are often a focus but too many of us don’t know how they are calculated and how we can get the best value from them.

SEE ALSO: How to buy a house with a low deposit

So, here are six points to demystify interest rates. Three components that go into deciding what the rates will be and three things you might think about when looking at home loan interest rates. That’s aside from the obvious questions – what can I afford, how long am I going to have the property, the purpose of the property and what’s my earning potential.

How interest rates are decided

1. Home loan rates are linked to deposit rates. The volume of customer deposits and the cost of securing those deposits is an important component in determining what a bank can afford to lend that money out as loans. Think of it like this, the cost of a deposit is a factor in deciding the cost that money can be lent out for customers to buy homes.

2. Banks also have to source money internationally to fund lending demands. The cost of those funds is constantly moving because of the ebb and flow of global economic conditions and geo-political happenings around the world. For example, the impact and fallout of recent uprisings in the Middle East and the Ukraine can affect the availability and cost of funds from global markets. The impact of global financial events also has a direct impact on the amount and costs of funds available in New Zealand. The Global Financial Crisis is a perfect example of that where the amount of funds available dried up significantly and what was available came with a high price tag.

3. Most consumers take out long term mortgages, 25 and 30 years. To be able to fund these banks need to secure long term funding from within New Zealand and offshore. This is sourced from wholesale debt markets through bond programmes. A bond programme is where a bank will offer an interest rate in exchange for funds invested for a fixed time period at a fixed rate.

Questions to consider when looking at home loan rates

How much impact does the Official Cash Rate over on home loans?

1. The Official Cash Rate (OCR), set by the Reserve Bank, is the biggest influence on home loan interest rates. Basically it’s a tool used to help manage inflation and New Zealand’s economic activity, as it influences the price of borrowing and/or saving money. Generally, the higher the OCR, the more attractive it is to save money, and the lower it is, the more attractive it is to borrow and spend.

Do we Fix, float, or both?

2. Splitting your home loan between fixed and floating is often termed the best of both worlds. You can have the certainty by putting some of your mortgage on a fixed rate, while also having some flexibility – for example to make lump sum payments – by leaving some of your mortgage on a floating rate

What other loans options are there?

3. Revolving credit: This lets you draw-down funds to pay for household projects, or make lump sum payments to reduce your debt. Interest is triggered once you start drawing down funds.

Cap your rates: If you’re worried a floating rate may skyrocket there are some options that allow you to cap your interest rates at a certain limit so it will never exceed that rate.

Offset your loan with your savings: This links your savings to your loan and the more savings you have, the less interest you will pay. Say you have a loan of $300,000, and you have savings of $25,000, with an offset loan you only pay interest on the difference, i.e. $275,000.

SEE ALSO: How to buy a house with a low deposit

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