What influences shifts in mortgage rates

Whether they’re going up or down, home loan interest rates always seem to be in the news. Let’s discuss what factors can affect these shifts, and what you could do when rates rise or fall.

4 minute read

Interest rates are made of many parts

The first thing to understand is there’s a range of factors that influence how mortgage rates are set. Like where a bank gets its money, the Reserve Bank of New Zealand’s Official Cash Rate, wholesale financial markets - and uncertainty surrounding these – all influence interest rates, and these are only some of the elements. 

In this article we’ll break things down individually first, see what they mean, then look at how – when combined – they can cause mortgage rates to shift up and down.

Where does a bank’s money come from?

When someone wants a loan, they generally go to a bank. But where does the bank get this money? While it can come from a range of sources, one of the largest is from deposits in bank accounts. These deposits include cheque accounts, savings accounts, term deposits, PIE term deposits, bonds and so on. 

In effect, anyone with money in a bank account is ‘lending’ that bank their money and in return the bank offers them interest through savings and investment accounts. The bank then puts that money to work by lending it out at a slightly higher rate of interest. That’s why interest rates on savings are generally lower than home loan rates. 

In addition to deposits from customers, banks can borrow money from the Reserve Bank of New Zealand (RBNZ) and wholesale financial markets. When the cost of borrowing this money goes up or down, that cost (or saving) generally gets passed on to customers, which is when we might see our home loan rates rise or fall.

How the Official Cash Rate (OCR) influences things

You’ve probably heard about the OCR and how it can affect home loan interest rates. The OCR is the interest rate set by the RBNZ for overnight lending and borrowing between banks. It’s a key tool used by RBNZ to influence interest rates and maintain price stability in the New Zealand economy.

The RBNZ can increase or decrease the OCR, which helps control the stability of prices, which we know as ‘inflation’. Interest rates can influence the borrowing and saving behaviours of New Zealanders. 

When the OCR increases, borrowing becomes more expensive as rates for home loans and other kinds of borrowing can increase. However, interest-earning accounts - like an everyday savings account - can increase too. This tends to reduce spending and slow down inflation. If the OCR goes down, borrowing becomes cheaper with lower interest rates and savings accounts may earn less interest.

Think of it like a thermostat for the economy – just as a thermostat controls the temperature in your home, the OCR controls the “temperature” of the economy by influencing how much things cost and how much people may spend.

It's worth noting that, while banks often adjust their rates following OCR changes, they don't always move in lockstep – there are other factors they consider when setting rates, particularly the cost of funds from both domestic deposits and international wholesale markets.

Shifts in the market and uncertainty

We've covered how a bank funds home loans along with one of the key controls in New Zealand that can influence interest rates but this only scratches the surface of how things work. Because the system involves a constant flow of money between individuals, businesses, banks, and governments (both domestically and internationally) there's a wide range of other factors that can influence how interest rates are set.

Lenders and borrowers use historical data and trends to try overcome this uncertainty but past performance isn't a guarantee of future outcomes. Unexpected events both in New Zealand and around the world can influence how interest rates are set and highlight how uncertainty needs to be considered when it comes to making decisions about your home loan.

What this means for you

There’s more to it than the basics we’ve covered above, but this gives you an idea of the key elements that cause the movement of mortgage rates and how the system works. 

As you can see, even a brief explanation is quite complex. A rise here may be offset by a fall there, meaning there’s no change in a rate. Or, in an attempt to help curb a rise in inflation, the RBNZ may increase the OCR, potentially influencing banks to shift interest rates.

While there’s not much you can do about the interest rates, there are plenty of ways to manage your home loan to maximise efficiency and minimise your interest payments. Check out our guide on ‘What to think about when your home loan fixed rate is ending’, and our article on ‘What to consider when interest rates decrease’. Both have plenty of insight on how you can make the most of changes to interest rates.

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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.

This article is solely for information purposes and is not intended to be advice with respect to any matter discussed in it. If you need help, please contact BNZ or your professional adviser. Neither BNZ nor any person involved in the material accepts any liability for any direct or indirect loss or damage arising out of the use of, or reliance on, all or any part of the content.