Borrowers may lose out on better options by chasing the cheapest rate
With mortgage rates continuing their downward trajectory from the 7.09% peak reached in early 2024 to current advertised rates below 5%, and the Official Cash Rate dropping to 3.25% in May, New Zealand borrowers have good reason to focus on interest costs. However, focusing exclusively on securing the cheapest possible rate could be costing them more than they realise.
Leading economists are forecasting further OCR cuts of up to 1% throughout 2025, yet mortgage advisers are increasingly finding that focusing solely on rate comparisons can prevent clients from achieving their broader financial goals.
Jeff Royle from iLender has observed this phenomenon throughout his career across multiple countries, and he notes that New Zealand stands out for its focus on rates.
“"You'll get a much better deal from a bank as opposed to a non-bank in terms of interest rates,” Royal told NZ Adviser. “But I would say rates are only one side of the equation. I’ve worked in several counties, and I don't think I've ever seen a country like New Zealand as obsessed with interest rates.”
"The first question is 'can you help me out?' and the second question is about interest rates,” he said. “Although I understand that, I sometimes find it a bit frustrating because people can lose sight of their goals.”
The $80,000 lesson in perspective
These “missed opportunities” are particularly relevant in the property investment space, where non-bank lenders often offer more flexible terms compared to the main banks.
A tale of two clients perfectly illustrates the cost of rate fixation. Royle recalled how two identical scenarios played out very differently based on each borrower's willingness to see beyond the interest rate.
"A really good example is a client I had a few years ago wanting to buy an investment property. At that time you needed a 40% deposit, and there was a non-bank lender doing it with a 20% deposit,” Royal said.
“They charged 1% more than a bank for the privilege, but that's the price you pay for not having the required deposit for a main bank. The client was quite upset by that and didn't go through with it.”
Just hours later, another client with identical circumstances took the deal. Less than six months later, Royle got a call from the client explaining that after some renovation on the property, they’d come out with an $80,000 profit.
The mathematics were even more compelling when Royle crunched the numbers.
"I then ran some maths, and the difference in the borrowing between the bank and non-bank interest rate was $420 per month,” he said. “Within six months, the client had paid less than $3k in extra interest, but had made an $80k profit. I think that's a pretty good deal.”
That's a 2,567% return on the extra interest paid – a figure that throws the focus on rates into sharp perspective. Property values are showing signs of recovery (albeit slow) in key markets and construction costs remain competitive. Non-bank lenders are also becoming increasingly flexible – and for many buyers, this could be the difference between seizing an opportunity or letting it pass.
“Rates are important, but they shouldn’t be the be-all and end-all,” Royle said. “If it stops you from doing what you want to do, then perhaps you didn’t want to do it enough.”
