What to consider when interest rates decrease

A drop in interest rates can affect people in different ways – we examine what homeowners might want to consider when rates drop and the opportunities that can arise.

4 minute read

Interest rates can be affected by a range of factors, and when one or more of these factors change, interest rates may increase or decrease. For instance, if the Reserve Bank of New Zealand lowers the Official Cash Rate (OCR), bank home loan interest rates may also follow suit.

For homeowners or those looking to purchase their first home, a decrease in interest rates can create a range of opportunities and might raise a couple of questions around what to do next on your home loan journey. Here’s a few things we think are important to consider when interest rates are decreasing.

Take stock of your financial goals

Knowing what your financial goals are in the short-and-long term as well as where you’re at on your home loan journey can help shape your response to a decrease in interest rates. The goals for someone who just purchased their first home could look very different to someone wanting to sell their home in the next year or so, and how they react to a change will also be different. 

In general, it’s important to take the time to set and review your financial goals on a regular basis outside of when interest rates are changing.

What it means for your repayments

If a drop in interest rates results in your repayment amount decreasing, there’s a couple of scenarios to consider. Depending on your goals and situation, you could put the extra cash into saving for something or have it available to put towards your expenses.

If you’re able to do so, the other option is keeping your repayments at or near the amount you’ve already been paying. This could help you pay your loan off sooner as more of your repayment will be going to the principal of the loan.

The timing of when a decrease in interest rates will affect your repayments depends on if you’re on a floating rate home loan or a fixed rate home loan. You might think about ending your current fixed rate home loan early to take advantage of a lower rate but there’s a few things to consider in this situation before proceeding.

Considerations for fixed rate home loans and early repayment charges

When you lock in a fixed rate home loan, you’re agreeing to pay a set interest rate for a certain period. If interest rates drop and you’d like to take advantage of a lower rate before your current term has ended, you might need to pay Early Repayment Charges (ERCs). If you’ve got a BNZ fixed rate home loan you might be able to work out what your ERCs would be by using BNZ’s MyProperty.

BNZ’s MyProperty is a home loan calculator in BNZ Internet Banking that uses your actual BNZ home loan data and some assumptions to show how changes to your home loan could affect your interest payments and mortgage free date ¹. MyProperty also shows you whether there will be an ERC if you were looking to increase your mortgage repayments, make a lump sum payment, or break your fixed term loan.

The structure of your loan

When structuring your home loan it’s important to consider the different benefits of each option.

Fixed rate home loans provide the certainty of knowing you’ll be paying the same interest rate for a set period of time. The alternative is a variable or ‘floating’ rate home loan that changes along with the market. While floating interest rates are usually higher than fixed rates, you’re able to take advantage of a drop in interest rate as soon as it’s effective and you also have the flexibility to make additional payments without paying an ERC. On the flip side, a floating interest rate will also have an increase added as soon as it’s effective where a fixed rate home loan would only change at the end of the term.

Depending on your situation and goals you might want to take advantage of both options and structure your loan with fixed and floating rates to provide certainty and flexibility.

Increased activity in the market

For those who’ve been looking to purchase or sell, a decrease in interest rates can lead to a more active housing market. This could mean more homes up for sale, more house hunters going to open homes, and more opportunities to buyers and sellers.

What to do next?

A drop in interest rates creates a number of opportunities and considerations for homeowners – the key part is knowing what you’re aiming for in the short- and long-term. If you’re unsure on what to do next if interest rates are decreasing, you can always talk to a BNZ home loan expert to get a clearer picture of what your options are and help you find a way forward.

Related articles

Manage your home loan

Find out more

All home loans are subject to lending criteria (including minimum equity requirements), term and fees apply. An establishment fee of up to $150 may apply. Read our full home loans terms and conditions.

Available for most BNZ home loans. BNZ MyProperty is not financial advice. It uses assumptions to estimate both your mortgage-free date and the impact of any changes you make to your home loans. Some of these assumptions are different than those used elsewhere at BNZ, such as in the regular view of your home loan in Internet Banking. Dates and amounts are estimates only. Estimates of time added, and how far away your mortgage-free date is, are rounded up to the nearest month. Estimates of time saved are rounded down to the nearest month. For more information see: Understanding MyProperty assumptions.  

This article is solely for information purposes. It’s not financial or other professional advice. For help, please contact BNZ or your professional adviser. No party, including BNZ, is liable for direct or indirect loss or damage resulting from the content of this article. Any opinions in this article are not necessarily shared by BNZ or anyone else.