How to Navigate Rising Interest Rates as a Homeowner in New Zealand
The era of historically low interest rates in New Zealand has drawn to a close, ushering in a period of adjustment for homeowners across the country. With the Reserve Bank of New Zealand (RBNZ) having actively increased the Official Cash Rate (OCR) to combat inflation, many are understandably concerned about the impact on their mortgage payments and overall financial wellbeing. This article aims to provide clarity on the current situation and offer practical strategies to help you confidently manage your finances in this evolving interest rate environment, especially as we look towards potential changes in 2025.
Why interest rates rose and how it affects you
The primary driver behind the recent rise in interest rates was the RBNZ’s mandate to maintain price stability. Faced with inflation figures significantly exceeding its target range of 1-3% (peaking at 7.3% in June 2022), largely fuelled by both global factors like supply chain disruptions and strong domestic demand, the central bank began tightening monetary policy. This involved progressively increasing the OCR, the benchmark rate influencing borrowing costs across the economy. The first OCR hike occurred in October 2021, ending a seven-year streak, with subsequent increases bringing the OCR to a peak of 5.5% where it has remained for several consecutive reviews into 2024. The RBNZ explicitly stated these hikes were necessary to cool the economy, dampen inflationary pressures (including domestically generated inflation highlighted in reports like OneRoof’s analysis), and prevent mortgage rates from falling further due to banks’ lower wholesale borrowing costs. Factors like post-flood economic stimulus and a tight labour market, which could potentially fuel a ‘wage-price spiral’ (a cycle where rising wages drive up prices, leading to demands for higher wages), also played into the RBNZ’s decisions. While current forecasts suggest the OCR may have peaked and could start falling around March 2025, the bank maintains a data-driven approach, meaning future moves will depend heavily on how domestic demand and inflation evolve.
This policy shift significantly impacted the economic landscape. While the New Zealand economy showed resilience, initially avoiding recession longer than predicted, the RBNZ itself acknowledged its actions were likely to induce an economic contraction. Commentators like economist Tony Alexander, featured in NZHL insights, suggested any recession might be relatively short-lived. A key mitigating factor has been the strength of the labour market. Unlike previous downturns, many businesses remained keen to hire, providing a buffer against widespread job losses which historically exacerbates financial stress for homeowners. Nonetheless, the RBNZ anticipated unemployment would rise as the economy slowed, projecting it to reach over 5% before potentially easing, possibly aided by increased net migration. This complex interplay between inflation control, economic growth, and employment created the challenging backdrop homeowners faced.
For homeowners, the most immediate consequence of the rising interest rates was an increase in mortgage servicing costs. As the OCR rose, banks passed these higher borrowing costs onto customers through increased mortgage rates. This meant a larger portion of regular payments went towards interest. The Reserve Bank’s analysis highlighted that the average share of disposable income needed for mortgage interest payments was projected to more than double from a recent low of 9% to around 22% during the peak. While this projected peak remained below the levels seen during the Global Financial Crisis in 2008, it represented a significant squeeze on household budgets.
The impact wasn’t felt uniformly. Those with floating rate mortgages or fixed terms expiring felt the pinch first. Approximately half of all mortgages were due for refixing within a year during the peak adjustment period, meaning many households transitioned from record lows (around 2-2.5%) to significantly higher rates (potentially 6-7%, as noted by mortgages.co.nz). This ‘refixing shock’ could translate into hundreds, even thousands, of extra dollars needed each month. Conversely, homeowners who fixed for longer terms earlier, or those who purchased years ago, were better insulated. Banks conduct stress tests when approving loans, assessing affordability at higher ‘test’ rates (often 3-4% above the offered rate, sometimes reaching 5.5% to 6.5% according to Global Finance), providing some buffer. However, the RBNZ noted that rates eventually exceeded the test rates used during the ultra-low period of late 2020 and 2021, placing pressure on those who borrowed near their maximum capacity then, including many first-home buyers.
Beyond the mortgage, rising rates rippled through household finances, often leading to reduced discretionary spending. This pullback in consumption was part of the RBNZ’s intended mechanism for cooling inflation. It also contributed to a correction in house prices, with average values falling around 17% nationally from their peak (and over 20% in Auckland and Wellington). While most long-term owners still held substantial equity, this decline impacted perceived wealth and borrowing capacity for recent buyers. Importantly, significant wage growth (up to 20% in some cases since the pandemic) helped many manage increased costs, and default rates, while slightly increased, remained relatively low due to strong employment.
Strategic approaches to managing your mortgage
Facing higher interest costs requires a proactive approach. It’s easy to feel overwhelmed, but focusing on what you can control is key. Start by taking a clear-eyed look at your household budget. Understand exactly where your money is going and identify areas where spending can be trimmed. This might involve more than just cutting back on subscriptions or dining out; consider renegotiating insurance premiums, comparing utility providers for better deals, pausing non-essential streaming services, or temporarily reducing contributions to discretionary savings goals. Every dollar saved can help offset increased mortgage payments and build a buffer.
Optimizing your mortgage strategy
Your mortgage structure plays a crucial role. Traditionally, homeowners choose between fixed and floating rates, or a combination. Floating rates offer flexibility but immediate exposure to hikes, while fixed rates offer certainty for a set period (e.g., one, two, or five years). In a rising rate environment, fixing provides stability. However, choosing the fixed term length is strategic. As interest rates are now expected to fall in 2025, shorter fixed terms (like one year or even six months) might allow homeowners to refinance onto lower rates sooner. Commentators like ASB’s Chris Tennent-Brown previously noted short-term rates might stay high until OCR cuts seemed imminent, but with cuts now anticipated in 2025, shorter terms are gaining favour. Corelogic’s Kelvin Davidson also highlights that factors beyond the OCR, like bank competition and offshore funding costs, influence mortgage rates. Splitting your loan across different fixed terms (e.g., part fixed for six months, part for one year) is another strategy to hedge your bets. Consulting resources like TMM Online or seeking advice from a mortgage adviser can help weigh these complex options based on current forecasts.
Refinancing involves replacing your existing mortgage with a new one. While less common for securing *lower* rates during the rising phase, it remains a valuable tool now that rates are expected to fall. Refinancing can allow you to access better rates potentially available from competitors or restructure your loan. You might also refinance to consolidate higher-interest debts into your mortgage, potentially lowering your overall interest burden, though careful calculation is needed. Extending the loan term during refinancing can reduce monthly payments and improve cash flow, but usually means paying more interest over the life of the loan – a trade-off to consider carefully. If your property value allows, refinancing could also let you access equity. However, weigh benefits against costs like break fees (if ending a fixed term early), legal fees, and valuation costs. Calculating whether the long-term savings outweigh these costs is essential.
Exploring other avenues for relief
Beyond restructuring, other actions can help. Maintain a good credit score, as it influences lender offers. If struggling, contact your bank *early* to discuss hardship options. Banks often have programs involving temporary switches to interest-only payments or loan term extensions. Many homeowners built repayment buffers during low-rate periods by paying extra; now might be the time to utilize that buffer if needed. Also, don’t overlook non-rate incentives. Banks compete fiercely, offering cashback deals (sometimes $3,000-$5,000 or more for new loans or refinancing), contributions towards legal fees (up to $2,500 in some cases), or waived valuation costs. These perks can provide valuable upfront financial relief, complementing a competitive interest rate.
Understanding interest deductibility rules for investors
For homeowners renting out residential property, understanding interest deductibility rules is crucial. The ability to deduct mortgage interest against rental income for tax purposes for existing properties acquired before 27 March 2021 was phased out but is now being phased back in. For the 2023-24 tax year (1 April 2023 to 31 March 2024), 50% of the interest was deductible. For the current 2024-25 tax year (1 April 2024 to 31 March 2025), 80% of the interest is deductible. From 1 April 2025 onwards, 100% deductibility is expected to be restored. For loans on existing properties taken out on or after 27 March 2021, interest generally wasn’t deductible between 1 October 2021 and 31 March 2024 (unless specific exemptions like the new build exemption applied), but these properties will also benefit from the phased restoration (80% in 2024-25, 100% from 2025-26). Always consult the Inland Revenue Department (IRD) guidelines or seek professional tax advice for specifics relevant to your situation.
Looking ahead Rate outlook and market resilience
While the pressure of high rates has been significant, there are clear signs of a shift. Economic forecasts now widely point towards interest rates falling through 2025. Infometrics’ Gareth Kiernan suggested those refixing one-year mortgages in early 2025 could see the most significant rate relief since 2009. This anticipated easing is linked to expectations that inflation will continue falling towards the RBNZ’s target band, allowing the central bank to gradually lower the OCR, potentially starting around March 2025 according to some financial adviser forecasts based on RBNZ projections. This prospect offers welcome relief for homeowners.
This potential easing is expected to boost household finances. Economists predict lower mortgage payments could significantly increase disposable income in 2025. Analysis suggests savings could amount to $300-$400+ per month for typical homeowners, freeing up cash and potentially stimulating economic activity. Despite challenges, the NZ housing market and financial system have shown resilience. Factors contributing include substantial equity buffers from past price growth, previous Loan-to-Value Ratio (LVR) restrictions (which limit borrowing based on property value), and a strong labour market keeping defaults relatively low. While non-performing loans ticked up, they remain contained. Furthermore, RBNZ Governor Adrian Orr has previously highlighted the robustness of household balance sheets and financial system stability.
However, maintain a balanced perspective. Forecasts are uncertain and depend on global conditions, domestic inflation persistence, and geopolitical events. A weaker NZ dollar or renewed global pressures could influence the pace of rate cuts. Therefore, while the outlook is more positive for 2025, continued vigilance and prudent financial management remain essential.
Charting your course with confidence
Navigating interest rate changes requires careful planning. It tests financial discipline but highlights the importance of understanding your mortgage and finances. By reviewing your budget, exploring mortgage options (like fixing short-term or refinancing strategically), staying informed, and seeking support when needed, you can manage effectively. Remember market conditions are cyclical; today’s pressures are expected to ease. Focus on building financial resilience through informed decisions – perhaps using online calculators to model scenarios or understanding bank stress tests. While the transition from ultra-low rates was significant, proactive management and a long-term perspective are key. Don’t hesitate to reach out to your bank or a qualified financial adviser for personalised guidance – informed homeowners are empowered homeowners, better equipped for financial wellbeing in 2025 and beyond.