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Understanding Interest Rates: How Customers Can Save Money

Understanding Interest Rates: How Customers Can Save Money

May 30, 2023

Understanding Interest Rates: How Customers Can Save Money

Interest rates are a crucial aspect of the financial system that affects everything from mortgages and car loans to savings accounts and credit cards. For customers, understanding interest rates can help them save money and make informed financial decisions. In this blog, we will discuss some key points about interest rates and how customers can save money. We will discuss why it is important to engage with a mortgage broker who can find the best rates for you as they have access to several lenders across New Zealand.

What are interest rates?
Interest rates are the cost of borrowing money or the return on lending money. When you borrow money, you pay interest on the amount you borrow, which is essentially the cost of the loan. When you lend money, you earn interest on the amount you lend, which is the return on your investment. With inflation levels currently high in New Zealand The Reserve Bank of New Zealand increases the Official Cash Rate (OCR) their aim in doing this is to control spending and bring inflation down. When OCR increases, banks increase their mortgage rates which is bad news for customers with home loans however if you have funds sitting in a term deposit this is good news for you as the term deposit rates increase as well.

How do interest rates affect customers?
Interest rates affect customers in several ways. For example, when you take out a loan, the interest rate will determine how much you will pay in interest over the life of the loan. A lower interest rate means you will pay less in interest, which can save you money. Similarly, when you invest in a savings account, the interest rate will determine how much you will earn in interest. An example of this is approximately two years ago interest rates in New Zealand were low as 2.19% on a $1 million mortgage you are paying interest only off $421 weekly whereas now if you have a mortgage of $1 million on an interest rate of 6.50% you will be paying $1250, which is a difference of $829 weekly. This is a significant increase for the majority of Kiwis across New Zealand and for those who got their mortgages on fully leveraged servicing during the lower rate period, they may be filling the crunch in the current environment.

Factors that influence interest rates
Interest rates are influenced by several factors, including inflation, economic growth, and government policies. When the economy is growing and inflation is low, interest rates tend to be low as well. On the other hand, when the economy is struggling and inflation is high, interest rates tend to be high as well. Government policies, such as monetary policy and fiscal policy, can also influence interest rates. The recent hike by The Reserve Bank was meant to be its final however with the recent budget announcement made by the government there well might be another hike in the OCR levels.

How customers can save money on interest rates
Customers can save money on interest rates by taking several steps. For example, when taking out a loan, customers can shop around and compare interest rates from different lenders to find the best deal. Customers can keep the same repayment level throughout the loan to reduce the loan term or increase their repayments which will reduce the loan term. For more on this, it is best to talk to a mortgage broker who can find appropriate structures to suit your own personalized needs as they need to take into account several factors before making their recommendation.

Conclusion
Interest rates are an important aspect of the financial system that can have a significant impact on customers. By understanding how interest rates work and how they are influenced, customers can make informed financial decisions and save money. Whether you are taking out a loan or investing in a savings account, it's important to shop around, compare rates, and consider the total cost of the loan or investment. By doing so, customers can achieve their financial goals and improve their financial well-being.

In the next blog, we will go in-depth on how interest rates affect your application with banks and their loan servicing requirements.

DISCLAIMER: The information contained in this blog is general in nature. We cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you. Before making financial decisions, we highly recommend you seek professional advice from someone who is authorized to provide financial advice.

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