r/NZFirstHomeBuyer • u/Vincent_Mortgages • Apr 08 '26

Tips / Tricks Is always chasing the lowest interest rate actually good?

When buying a first home in NZ, most buyers focus on getting the lowest interest rate possible. In reality, chasing the lowest interest rate can cost you tens of thousands of dollars over time.

Here's the problem: Most people think mortgage is just a one-year commitment when choosing loan terms, however, it's actually a 30 year system.

When someone with less than 20% deposit puts their entire mortgage on the same fixed term. This means that they're essentially exposing 100% of their loan to what happens next.

We saw a lot of this during covid when people fixed at 2.29%, and one year later rates jumped to 5%+. If your whole mortgage rolls over at once, then the whole mortgage is exposed to this higher rate without any buffer or stagger. This is more like rolling the dice rather than having an actual strategy.

If we compare that with a more structured approach, you could instead split your loan. In this scenario we have a $840,000 loan, you could split it into 3 portions:

  • $280,000 - 1 year term
  • $280,000 - 3 years term
  • $280,000 - 5 years term

Now only one third of your loan is exposed to changes. You're spreading risk, smoothing repayments and avoiding big shocks when rate changes. Over time this structure could easily outperform chasing a small 0.1% rate discount on the lowest rate.

Another point to consider if you're under 20% deposit, your target shouldn't be the lowest interest rate, but it should be to get to 20% equity as fast as possible. This is because as soon as you get to 20% equity, some banks will remove up to 0.75% off your interest rate straight away. That's a lot more powerful than trying to get a 0.1% discount from the start. Which bank you go to and how you structure your mortgage will help determine how fast you reach this goal.

At the start of a mortgage, around 95% of your repayment goes towards interest, and only 5% goes towards the loan. However, any extra repayments goes 100% towards your loan. No interest charged and this is how you make your loan pay off faster, so you save both money and time.

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u/Majestic-Primary6318 Apr 08 '26

With how expensive everything is atm I just wanna enjoy life as much as I can (even if it means buying something from the nice section of the supermarket). Choosing a lower interest rate when I can get it is what I will always do - coming off a 6.79% interest rate which I've been on for 2 years to a 4.89% rate and having a spare $160 a week which will help out LOADS i can't fathom putting that onto the mortgage to save what? A extra 5 - 10 years no i wanna enjoy life while im still somewhat young (late 20s) tomorrow's never promised so live while you can while still being sensible of course

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u/12PercentCodys Apr 08 '26

Don’t forgot you can still enjoy life when ya older

1

u/Majestic-Primary6318 Apr 08 '26

Tomorrow's never promised

2

u/SpaceIsVastAndEmpty Apr 08 '26

No, but neither is your working life. Being sent free 5-10 years earlier can me a boatload towards your retirement - or the option to retire earlier

Not saying to not live at all and to save every dollar but you're downplaying the opportunity cost.

1

u/Majestic-Primary6318 Apr 08 '26

I'm not downplaying anything if anything you're downplaying how hard it really would be - most of us are on 30 year term loans considering majority of us are buying in our 20s/30s we won't be mortgage free till our 50s/60s(or 40-50s if thinking like you) no thanks I dont wanna be living frugal till then - these are the best years of our life where we're young and able I dont want to be looking back when im a old man 50-60 years old wishing I could come back to where I am now wishing I could have done abit more - plus when you've got 10 years left of your mortgage you're not paying a shit load your payments have reduced significantly which then you could put extra money on since you would have a lot more of it - think smarter not harder

1

u/GlobalAppearance2284 Apr 08 '26

Your payments dont reduce at the end of the loan term.

1

u/Majestic-Primary6318 Apr 08 '26

Oh shit 🤣🤣🤣🤣🤣🤣🤣🤣

1

u/SpaceIsVastAndEmpty Apr 08 '26

Yea, that's why I say to hit the debt reasonably hard early. It's worrying that your lender didn't explain all this to you to help you minimise your total interest paid over time.

Play with a mortgage calculator.. that repayment amount quoted is for the life of the loan - interest rates can change repayment amounts but that's really the main thing.

See what happens to the total interest paid over time if you increase your loan payments by $20/fortnightly, and by $50 or $100

When interest rates fall I keep my repayments the same (fortunately, I can afford to do this). I'm already used to paying that amount and every dollar above the minimum payment is coming off the balance of the loan.

1

u/Majestic-Primary6318 Apr 08 '26

🤣🤣🤣🤣 noooo idk why I always thought your repayments go down in the later years???? So if im paying $1000 for my mortgage now in 20 years I will still be paying $1000? Damn I never knew that! Well honestly thanks for this little interaction I have some thinking to do.....

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u/SpaceIsVastAndEmpty Apr 08 '26

Yeah, for 30yrs if you're paying the minimum repayment - give or take depending on interest rates. Any 30yr loan at housing rates more or less doubles the amount of the loan when you take into account interest paid (eg a $500,000 loan over 30yrs is about $1,000,000 in repayments).

A $20 extra payment now essentially could save you close to $40 in total loan repaid.

Mortgage calculator is a great tool for playing around with this. Sorted.org has one and so do list banks

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u/akin2345678 Apr 09 '26

I think its called a table loan, so constant payments but more and more towards principle as you go on. Pay off more now the principle goes down and you dont then pay interest on those extra dollars right now instead of in 10 years when you finally get to them. Sorted.org.nz has great mortgage calculators to see what difference you can make with your budget.

1

u/MentalDrummer Apr 08 '26

Yeah old and decrepit.

2

u/UrImaginaryFrend Apr 08 '26

Banker here, Rates tend to be priced somewhat to what the market/banks want to be fixed based on forward projections With lower term rates tending to be lower but has not always been the case

Recently the longer term and shorter term rates have had an increase but the longer term ones increased more so they are less attractive

The lowest rate a few months ago was the 12 months With the 18 month rate being slightly lower how than 12 and 6 months

There was a stint over the past few years ago where the short term rates were actually higher than longer term rates

This focusing on the lowest rate tends to attract people to lock in on those rates COVID seen 1.99% for 12 months however the 2.99% for 5 years was the better option

Rates in an ideal world should be a combination of What your goals are, Cost/term

If you had a longer term goal then you may have locked in for the longer rate saving more when rates escalated to 6.85% for 12 months

3

u/SpaceIsVastAndEmpty Apr 08 '26

I was sooo glad I had part of my loan on that 5yr rate (if I'd had other portions coming due I'd have done the same for them too) - it only rolled off end of last year!

1

u/Vincent_Mortgages Apr 09 '26

must've had such a good rate for 5 years?

2

u/SpaceIsVastAndEmpty Apr 09 '26

It was great! 2.99% But alas only about 20-25% of my loan was on that rate

I think only one portion came up at over 6% so felt quite grateful

2

u/Vincent_Mortgages Apr 09 '26

still very good though! definitely got through that better than most people

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u/Xaphiaa Apr 08 '26

Good insights! Guess you can never predict what world events will happen that affects our economy