How Do Banks Set Mortgage Interest Rates?

When you take out a mortgage with a bank, there are two components to the home loan, the mortgage interest rates(cost of borrowing the money) and the principal (the amount you initially borrow from the lender). Mortgage Interest Rates

Have you ever wondered how the mortgage interest rates (cost of the money) are calculated?

Rather than plucking a number out of thin air, there are several factors that contribute to that rate. These are the main ones:

Official Cash Rate (OCR)

Lending institutions, like banks, cannot simply magic up money to lend to their customers.

If a bank needs money that it can’t get immediately from deposits and other sources, it can borrow from the Reserve Bank at a slightly higher rate than the published OCR

The OCR is set by the Reserve Bank of NZ and is the fixed rate at which banks can borrow capital.

The OCR is reviewed periodically by the Reserve Bank to ensure it is set at the correct rate for the current economic climate.

So, changes in the OCR can influence mortgage interest rates as they impact the cost your bank will need to pay for loan funding.

Funding Costs

The Reserve Bank is not the only place where your bank will source the funds to lend to their customers.

They will also borrow money from term depositors and international money markets.

Again, there are costs associated with this borrowing, which your bank will need to pass on to you as the customer.

They recover these costs by building them into your mortgage interest rates.

Basically, the more it costs for banks to borrow capital, the higher your mortgage rates will become.


There are only so many mortgage customers out there, so lenders will compete for their business.

This can have a positive impact on mortgage interest rates as banks may adjust those rates in response to what their competitors are doing in order to attract customers.

Economic Conditions

The overall economic state both locally and globally can also impact interest rates.

For example, NZ is currently experiencing a higher-than-average rate of inflation.

The Reserve Bank is taking steps to raise the OCR in a bid to bring inflation back within the recommended range.

Essentially the reserve bank wants people to slow down on spending and increase levels of unemployment to slow demand for consumer goods.

Other factors like global interest rates, global financial markets, and political events can all impact mortgage interest rates.

As can the economic climate of major trading partners like China, Europe, the USA, and Australia.


Lenders will also assess the risk factor of lending to individual customers.

They will assess your credit score, income, property type, and value to determine whether you are a high or low-risk customer.

Customers with a higher risk profile might be offered higher mortgage interest rates to compensate for the increased risk the Lender takes on by lending funds to you.

Bank Costs

Whether we like it or not, banks operate as a business and have associated costs to factor in.

“These, and the other costs banks face, like paying staff wages, marketing to keep their brands in the public’s consciousness, renting premises, paying tax, hedging their interest rate and currency risks, and lobbying for bank-friendly laws, add up to banks’ cost of doing business, and it is all priced into what they charge for their home loans.” [source

As you can see, there are a number of factors that contribute to the interest rates you pay on your mortgage. They are not simply determined by the OCR, but it is a large contributing factor.  

Strength of Banks Down Under

New Zealand-registered banks are tested annually against a range of scenarios that simulate severe pressure on their finances. [source]

A Quick Update – March 2023

Cash Rate Rises Again

As expected, the Reserve Bank increased the official cash rate (OCR) on Feb 22, bringing it to 4.75%. So, what does that mean for you as a mortgage holder?

We are all well aware that mortgage interest rates have increased from the 2% mark to the 6% mark in the last two years. But are the mortgage rates going to increase further?

Well, they may do. But it might not be by as much as you fear.

Just because the cash rate has gone up by 50 basis points, it doesn’t mean that mortgage interest rates will immediately follow suit.

We will likely see changes in the floating and one-year fixed rates, but longer-term rates will probably not be as impacted.

If you are one of the 50% of mortgage holders whose rates are coming up for renewal this year, we strongly recommend taking advice on what is the best option for your circumstances. Have a chat with the friendly team at Oliver Broomfield Mortgages today.  

Term Deposit Rates Rise

One of the positive aspects of mortgage interest rates increasing is the fact that deposit interest rates generally rise also.

So, if you have some savings, you can make them work better for you right now.

Term deposit rates are up.

Kiwibank is currently advertising rates of 5.49% interest for a 1-year term deposit (minimum investment of $10,000).

The other big banks are also offering rates upwards of 5%.

These term deposit rates are significantly higher than what we have seen in recent years.

It is worth considering as a low-risk investment. But, if you have any queries about whether a term deposit is the best investment for you, speak with a trusted financial advisor first.

Contact me for a proven referral to a Retirement & Investment Financial Adviser.

If you need to refix your mortgage or perhaps review your mortgage setup or see if there is a better option available for you, then, get in touch with Oliver Broomfield Mortgages today.

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Frequently Asked Questions

The advantage of using a mortgage adviser is that they can negotiate with a number of lenders to find the deal that best suits you. They do all the leg work for you, saving you time.

We help assess all your options, whereas the Bank is restricted by being only able to present one view.

While banks expect the client will negotiate with them, or accept the given rate, mortgage brokers are more likely to go to bat for you, to get a lower interest rate.

Our processes make financing your house purchase easy; providing quick personal service that takes the stress out of financing your home loan. With our wealth of experience in the finance industry, we know how to get the best deal for you.

Absolutely! We can still work with you using email, phone calls, and video calls. Whatever your financial situation is, we have a range of options to communicate with you whatever circumstances.

Yes, we have an online application system or a pdf form that can be completed. Supporting documents can either be uploaded directly into our system or emailed. We can use telephone, zoom, or email for further clarification or look at scenarios and receive and send information.

A home loan pre-approval is a conditional approval confirming that we can lend you a certain amount of money, provided the property you purchase meets the lender’s home loan criteria. It’s a good idea to ask us for a home loan pre-approval before you start house hunting. It will help you determine how much you can borrow and to give you some bargaining power when negotiating a purchase price.

Saving a deposit is probably the biggest hurdle for most first home buyers. First home buyers need to have saved at least 5% deposit with 20% or more being the optimum. Remember that this can be made up from a KiwiSaver first home withdrawal and some first home buyers may also be eligible for a HomeStart Grant. Gifts and deed of debts from friends and family are also common.

While there has been a lot of publicity about the need for home buyers to have a 20% deposit; there are still options available for you. We can talk you through what may be available to you including:

  • The ability to access low equity loans
  • Using your Kiwisaver contributions towards your deposit
  • Building your own home
  • Accessing parental assistance to increase your deposit.

The size of your deposit makes a big difference to the interest rate and the other costs you could potentially pay on your home loan. Generally, for lending where the deposit is less than 20%, the lender will also charge a Low Equity Fee (LEF) or Lenders Mortgage Insurance (LMI). Interest rates may also be higher for loans with a low deposit.

Whilst assessing a loan application, banks will scrutinise your bank account (usually the most recent 3 months bank statements).

In particular, they are looking at how well (or not) you manage your account.

Do you have dishonors, and or unauthorised overdrafts?

The better your account conduct the better your chances!

The banks also want to make sure all expenses including fixed and discretionary costs are included in the mortgage application expenses.

This will be determined by your income, your capacity to repay the loan, and the property type along with the current lending restrictions imposed by the reserve bank. Contact us today to find out.

The income you will need to earn will depend on the size of the loan, the bigger your loan the more you will need to earn.

As a rule of thumb if you are a first home buyer who is currently renting and have also been able to save some money there is a good chance you will meet the banks’ income criteria.

A LIM report is a summary of information that the local Counsel hold on a property. The report covers off information regarding consents, permits, code of compliance, potential erosion, subsidence, flooding of any type and the possible presence of hazardous substances. private and public stormwater and sewerage drain, rates, including any overdue rates.

Your solicitor should review this document.

Absolutely, we do this every day for many existing clients. We can use our scenario calculator to ensure you meet lender criteria and affordability for yourself.

Yes, you can borrow money in New Zealand and may be able to borrow up to 80-90% of the purchase price of a home.

To be eligible to for the KiwiSaver First Home Withdrawal Scheme you must:

Be purchasing your first home;

  • Have been a member of KiwiSaver for a minimum of three years;
  • Have your KiwiSaver account with a KiwiSaver provider that allows saving withdrawals; and
  • Intend to live in the property for at least six months
  • We recommend that you contact your KiwiSaver provider and check their individual policy on withdrawals for first homes.
  • If you are eligible to withdraw money from your KiwiSaver, you may also be eligible for a first home deposit subsidy of up to $20,000.00 from Housing New Zealand – known as a HomeStart Grant.

Using a mortgage broker generally means no direct costs to you for their services but there are other unavoidable costs. These may include:

  • A Registered Valuation ($800 – $1,200)
  • Solicitor Costs ($800 – $1,500)
  • LIM report ($150 – $400)
  • Builder’s Report ($100 – $500)
  • Weather Tightness Report for Monoclad houses ($300 – $1,000)
  • Finance fee for non-bank lending (~1%)

Prices can vary. Always request a quote before ordering any of these services. 

The banks all have different policies and risk tolerances. Buyers can get frustrated and waste a lot of time going to banks that won’t suit their needs.

Using a mortgage broker gives you a view of all the banks and their policies. It means you find the right bank faster and with less stress. With a mortgage broker, getting a mortgage isn’t complicated.

It’s about proving you have enough deposit and enough income and then heading to the right bank with that information.

Some tips to making your mortgage application easier: get your documentation sorted early and keep your spending as low as possible in the 3 months leading up to your application.

We will always act in the best interest of the client and will ensure that any deal we broker is the best we can do for the client.

While there can be variances in the amount different lenders pay us we do not favour any particular lender for this reason.

We are also members of NZFSG & Financial Advice New Zealand both of which have ethics that we must adhere to.

We can also be audited at any time by the FMA (Financial Markets Authority)

No… The lenders that use our services see us as an efficient channel to obtain business from. They only pay us on success i.e. when the loan settles.

We sit alongside their other channels such as a bank branch or mobile manager.

The cost of obtaining business from a mortgage broker is comparable to these other channels the banks choose to use.

For this reason, it will cost you no more to use our services.

Mortgage advisers (often called mortgage brokers) are paid by the bank when a mortgage is drawn down.  If that mortgage is discharged (repaid and closed) within a short amount of time – typically 27 months – the broker must repay some or all of the commission (often referred to as a clawback).  In this instance, the mortgage broker has essentially done the work for no pay.

We reserve the right to charge for our time if a clawback is incurred.  The fee will be the estimated amount of hours the mortgage took at an hourly rate of $250 per hour.  Unlike other fees, such as Break Fees from the bank, we have capped the amount we can charge clients at $2,500.

If you are refinancing or selling your house, the best thing to do is immediately talk to your adviser and discuss if any clawback fees will be charged.

If the property is for you to live in, this is something you should discuss with your Lawyer at your initial meeting.  If it will be an Investment Property, you should discuss with your Accountant.  We would also suggest you find a property accountant, someone who deals in property all the time rather than just as a side part of their business.  

Refinancing creates an entirely new mortgage and an opportunity to restructure in a way that better suits your personal situation.

People refinance for lots of personal reasons, from changing circumstances to life goals and interest rates.

People often refinance with us because they want to get ahead faster and take advantage of the smart Go Home Loan structure and personalised support we offer.

The key to an effective loan structure is putting your savings and income into an account that helps reduce the daily interest costs of your mortgage, not a separate unlinked account.

Why? By combining all your income and savings against your Go Home loan, you’re making your money work harder for you.

A Go Home Loan is a much simpler mortgage structure that still uses your income and savings to reduce your daily interest costs.

Generally, banks offset your money from multiple accounts. Some clients find it difficult to track multiple accounts and figure out how much interest is being charged or offset.

We find that using a Go Home Loan is an effective loan structure by putting your savings and income into an account that helps reduce your daily interest costs.

As soon as you have decided to look for a property, the earlier the better.  We recommend a good, early, communication plan with your entire team including your Mortgage Broker, Accountant, and Lawyer/Solicitor