Getting a lower interest rate is one of the best ways to save on your loan. Even a difference of a few basis points saves you thousands over a 30-year mortgage. Take a look at our tips for saving on your mortgage, as there’s more to it than just a low-interest rate.
Floating versus fixed rates.Variable or floating mortgages usually have lower rates and offer more flexibility than a fixed-rate mortgage. However, you can find very competitive fixed-rate loans too. If rates rise while you’re still on a fixed loan, you may end up with a more competitive rate.
Introductory rate discounts. Look out for loans with discounted introductory interest rates. These might be some of the lowest loans on the market. However, you need to pay attention to the interest rate once the discount period ends and refinance to a better loan if your new rate jumps up. Also, look at discharge or exit fees. You don’t want to get hit with a big fee when trying to exit the loan later (although a small fee isn’t so bad if the rate is very competitive).
The comparison rate. A mortgage’s comparison rate takes the cost of loan fees into account. It does this using a hypothetical mortgage and combining the fee cost with the interest rate. It can be helpful, but you’re better off looking at the actual fees of a loan and working out what they’ll cost you.
Negotiating. Once you’ve chosen a mortgage you can ask for a discount. It never hurts to ask.
Your interest rate determines the cost of your monthly repayments. The cheapest home loan is usually the one with the lowest interest rate. It’s the first thing you should look for.
Let’s compare three loans that are otherwise identical and see how the interest rates affect the repayments.
You can see from these examples how the lowest interest rate makes your repayments cheaper each month. Over the life of a mortgage, this really adds up.
Over 30 years, with a 3.50% interest rate on a $600,000 loan, you end up paying $116,475 more in interest than with a 2.50% interest rate.
Can I get a lower rate from a smaller lender?
Many Kiwi borrowers may go with one of theBig Four banks (Westpac, ASB, BNZ and ANZ). However, you may find a cheaper mortgage interest by looking at a smaller lender. Examples of smaller lenders include:
Online lenders.Some lenders save on the cost of physical branch locations bygoing entirely online. They pass the savings onto borrowers in the form of lower rates.
Small lenders and credit unions. Local credit unions and other customer-owned banks may be an alternative for a mortgage, as they can offer competitive deals. There are also smaller banks that operate nationwide which also offer very good deals.
However, don’t count the Big Four out completely. It’s a crowded market and everyone wants your business. While everyone cares about getting a cheap mortgage, the big banks do offer apps, strong customer service, more branch locations and the biggest selection of other financial products, like transaction andsavings accounts. Those are important considerations too.
Get a loan with low fees
Most mortgages come with fees. These are separate from the interest rate and your repayments, but they are calculated into a loan’s comparison rate.
Upfront, one-off fees (like application fees) can be expensive. You should also watch out for smaller, ongoing fees that some lenders charge monthly or annually.
So should I avoid fees at all costs?
Not always. You need to crunch the numbers and work it out for yourself. If a loan has a low rate and features you need (like an offset account), then it might be worth paying the fee.
Some fees only come at the end of the loan or when switching lenders. Keep this in mind if you’re planning to refinance (which you probably should).
Choose features that save you time (and money)
Mortgages with the lowest interest rates often have fewer features. However, the right features can help you get more out of your mortgage and save you money. It depends on your strategy.
Offset accounts.An offset account is a transaction account linked to your home loan. It reduces the amount of interest you’re repaying. For example, if you borrow $200,000 and save $10,000 in a 100% offset account, you only pay interest on $190,000. You can use the offset account funds if you need to spend them, but then you have to pay interest on the full amount.
Loan portability. This feature lets you move your loan to a new property without the high costs of exiting a loan and taking out a new one.
Unlimited extra repayments. Some lenders charge penalty fees when you make extra repayments. The most affordable mortgage could be the one that lets you pay it off in your own way, so watch out for repayment fees. Note that while most lenders allow you to pay variable-rate mortgages off early with no problem, fixed loans charge a penalty fee known as break costs.
It is possible to get a cheap home loan that also has the features you need. You just need to do your homework.
Save a bigger deposit
The bigger your deposit, the less you have to borrow, which makes for cheaper repayments. In some cases, a bigger deposit unlocks lower rates. Most mortgages require a deposit between 5% and 20% of your property’s value. If you borrow with a deposit that is less than 20% of your property’s value, you may need to pay lenders mortgage insurance (LMI) on top of your loan.
A 20% deposit means avoiding LMI, which makes the loan cheaper. If you can’t save 20% but your parents own a home and are willing to help you, they could guarantee your deposit and help you avoid the LMI.
Take a closer look at your repayments
Your repayment structure has a big effect on the cost of your mortgage and it’s important to understand how interest is charged. Most borrowers choose principal-and-interest repayments but you have the option to make interest-only repayments instead. Both are “cheaper” in different ways:
Principal-and-interest repayments.You borrow money (the loan principal) and repay it together with interest, which means you’re paying off your debt immediately. Principal-and-interest loans tend to have the lowest interest rates and work out cheaper in the long run for most borrowers.
Interest-only repayments.Withan interest-only loan,you get an initial period where you only repay the interest charged on the loan and don’t pay off any of the principal. This option makes your repayments much cheaper early on but by the end of the loan, it costs you more. Because the loan principal needs to be paid off and the longer you take the more interest you pay. Also, rates on interest-only loans tend to be higher than on principal-and-interest rates.
So which is the cheaper mortgage?
A cheap mortgage means different things to different borrowers. Some property investors favour interest-only loans because they are so cheap at the start, which makes sense if you’re hoping to turn a profit in a few years in a booming market by selling quickly (also known as “flipping” a property).
If you’re struggling to make repayments because you’ve lost your job or your income has fallen, then the cheapest mortgage is the one with low repayments right now. In that case, you might need to go interest-only for a while (lenders usually let you switch repayment types).
However, for most borrowers the cheapest home loan has a lower interest rate and lets you pay down debt from day one, costing you less interest over the life of the loan. That’s a principal-and-interest loan.
Choose the length of your mortgage carefully
The faster you pay off a mortgage, the less interest you pay over time. So even though the repayments for a 25-year mortgage might look high compared to those of an identical 30-year mortgage, the savings would be higher.
That’s great, but a shorter loan term means your repayments each month are a lot bigger. There’s cheap right now and then there’s cheaper over the life of the mortgage.
Here’s a simple breakdown. Let’s take three mortgages, all with 3.00% variable interest rates and loan amounts of $600,000. Now let’s look at both the monthly repayments and overall loan cost (the cost of all the repayments you make until the loan is paid off with the interest) if each loan has a different length.
The differences here are enormous. The 30-year loan’s monthly repayments are $316 cheaper than the 25-year loan’s. However, over the life of the loan, you end up paying $57,084 more.
The 30-year loan’s repayments each month are $798 cheaper than the 20-year loan’s, but if you pay that loan off in 20 years you save $112,044 in interest.
This is why the notion of the cheapest home loan really does differ depending on what you need. If you’re borrowing a lot of money, then a 20- or even 25-year loan term might make your monthly repayments too expensive. Even if it saves you in the long run, it’s not affordable in reality.
Similarly, the lower repayments of a 30-year mortgage cost you more over time. However, for most borrowers, that’s a sensible trade-off.
I have a few more questions about getting the cheapest home loan
Online lenders traditionally have the lowest mortgage rates. They have lower costs because they don’t operate branch networks. However, today, many traditional banks can match or even exceed the competitive mortgages on offer from these cheaper providers, so it pays to look at all lenders when seeking a cheap loan.
Some lenders offer special mortgages tailored to first home buyers that are worth checking out. You may be eligible for the First Home Loan scheme, or the First Home Grant if you’ve been contributing to KiwiSaver.
Plus, don’t forget about first home buyers’ grants and financial help offered by the government.
Pensioners can face challenges finding a home loan, but there are options out there. You may face stricter lending criteria and need to provide extra documentation when applying for a loan.
Saving up for your mortgage deposit is a serious challenge for everyone. However, there are ways to trim your expenses, build your deposit and find mortgages that don’t need large deposits.
You should always be comfortable with the lender you’re planning on going with. If you’re not aware of a lender, try calling them to find out about the company and their service level before lodging an application. Speak to previous customers or read customer reviews on reputable sites.
Keep in mind that little-known lenders might be funded by a larger bank.
Richard Whitten is a senior writer at Finder covering home loans and property. He helps everyone understand the ins and outs of mortgages so they can make smarter property decisions. He has written for Money Magazine, Homely, and for multiple banks and lenders. Richard trained as a high school teacher but found it easier to manage personal finances than a classroom full of kids. Before joining Finder, he edited textbooks and taught English in South Korea. Richard has a Bachelor of Education, a Graduate Certificate in Communication and is currently studying a Certificate IV in Finance and Mortgage Broking.
When you’re a temporary resident in New Zealand, you want to see everything, which can be difficult without a car. Luckily there are some lenders that consider car loans for people on a work or study visa. Find out how to apply here.
How likely would you be to recommend finder to a friend or colleague?
Very UnlikelyExtremely Likely
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which finder.com receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. finder.com compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.