Fixed & float loans: Is it time to review your home loan?

With the official cash rate sitting at just 2.25% now is a fantastic time for New Zealanders to review their home loan to ensure that it’s competitive.

In 2016, Canstar has rated 58 home loan products from 10 providers in New Zealand. Our research showed some interesting results, with a 40 basis point difference between the minimum and maximum floating rates on our database at time of writing and up to a 74 basis point difference between minimum and maximum fixed rates over a defined term.

Table: Residential Home Loan Market – Snapshot of the current market (31/03/2016)
Floating 1 Year Fixed 2 Year Fixed 3 Year Fixed 4 Year Fixed 5 Year Fixed
Average 5.62% 4.53% 4.64% 4.89% 5.09% 5.21%
Min 5.45% 4.15% 4.25% 4.64% 4.89% 4.99%
Max 5.85% 4.85% 4.99% 5.25% 5.35% 5.40%
Difference between min and max 0.40% 0.70% 0.74% 0.61% 0.46% 0.41%
Source: Based on products on Canstar database for a $300,000 loan.

Sometimes we can put home loan refinancing into the too-hard basket, but many borrowers might have more negotating power than they realise. The rate you can access will depend on the amount you are borrowing, the deposit amount you have available and your overall credit worthiness. It is certainly worth asking your bank the question though; on a $300,000 loan over 25 years, for example, even a 25 basis point reduction in interest rate could lower your monthly repayments by around $45 per month.

Home Loans: fix or float?

It would appear that our major financial institutions are pricing in further reductions to the official cash rate, with the average fixed loan interest rates sitting significantly lower than the average floating rate.

Based on average rates, floating interest rates would need to reduce by 0.98% and 0.73% before interest rates would be on par with current advertised 2 and 3 year fixed rates respectively.

A fixed-rate loan certainly won’t be for everyone, but the low fixed rates on offer certainly have the attention of would-be borrowers. In March, around 80% of the visitors to the home loan selector tables were looking for a fixed-rate loan, with the 2 year fixed rate, in particular, attracting almost a quarter of all searches.

If you have cash to spare…

One advantage of a floating rate home loan is that, if you’re cashed-up, you might be able to utilise an offset account (a transaction account linked to your mortgage).

Both of the floating rate home loan products that achieved a Canstar five star rating in 2016 have the option of including an offset transaction account.

The money sitting in an offset transaction account reduces the amount of home loan that you are charged interest on. So a large sum of money sitting in an offset account for a while can end up saving you a respectable amount.

As an example, Canstar has calculated the benefit of holding either $20,000 or $40,000 in a mortgage offset account for two years, against a $350,000 home loan, as follows:

Table: Interest paid on a $350,000 loan over two years
Product Interest Rate Monthly Repayment Amount Owing after two years Interest Paid over two years
Floating 5.62% $2,013.69  $340,510.22  $38,838.84
Floating with $20,000 in offset 5.62% $2,013.69  $338,136.88  $36,465.51
Floating with $40,000 in offset 5.62% $2,013.69  $335,763.55  $34,092.17

Offset accounts are far less common in new Zealand than they are in Australia, for example, but for those that have spare cash an offset account can be a useful place to park it; the money effectively “earns” your mortgage rate in the form of reduced interest charges on your loan and because you’re not receiving that saving as income, it’s tax free.

Which home loan lenders offer outstanding value?

Canstar’s Home Loan Star Ratings compares 58 home loan products across five categories of floating, fixed rate and line of credit loans for both residential and investment purposes. The Star Rating Report is a useful way for mortgage holders to assess how their current lender compares, as well as to narrow down products worth investigating further. Products specific to certain groups or with restrictions on eligibility are not included in the ratings.

Five stars for oustanding value have been awarded to:

Residential Floating & Investment Floating

  • BNZ
  • Kiwibank

Residential Fixed & Investment Fixed

  • ASB
  • Sovereign

Line of Credit

  • ANZ
  • ASB

Canstar congratulates all institutions on their achievement. More information about Canstar’s ratings can be found here.


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