If you are searching for New Zealand interest rates, you are likely looking for the average rate for mortgages, personal loans, and the like. There are several important factors to consider when reviewing interest rates in New Zealand which we will be covering in this article.

Overview of interest rates

Before we look in-depth at how commercial interest rates are calculated, it is essential to note the strong correlation between mortgage rates, personal loan rates, etc. and the official cash rate, controlled by the Reserve Bank of New Zealand. The terminology in New Zealand is slightly different to places such as the UK. In the UK, the official cash rate is known as the base rate, while in New Zealand, the base lending rate is the average rate of interest charged on loans by commercial banks to new businesses.

As the official cash rate is the rate at which commercial banks can borrow money from the Reserve Bank of New Zealand, this is a straightforward way in which the Reserve Bank can influence the New Zealand economy. For example, as we have seen of late, if the economy is showing signs of overheating and inflation higher than expected, increasing the official cash rate will make borrowing more expensive. This, in turn, will reduce consumer spending, slow down the economy and, hopefully, rein in inflation.

Commercial finance

Here at Quick Loans, we offer a wide range of secured loans, which include:-

• Personal loans
• Car loans
• Debt consolidation loans
• Instant finance
• Same day loans
• Small loans
• Online loans
• Second mortgages
• Finance companies
• Business loans
• Bridging loans
• Cash loans

Our website contains details of all the fees and methods of calculating interest across different loans. It is vitally important that you fully understand the mechanics of any finance made available and the overall cost. We will now take a look at various types of interest rates and how they are calculated.

Nominal interest rate

The nominal interest rate has to all intense and purposes, been replaced by the comparison interest rate, which gives a more accurate view of the interest rate charged. For example, the nominal interest rate does not include setup charges and ongoing fees or reflect how interest payments are calculated.

Example loan: One year $20,000 loan at 13% nominal interest rate
Interest: Charged annually
Interest: $2600
Total repaid: $22,600
Nominal interest rate: 13%

This is all relatively straightforward, but in real life, finance agreements may include setup charges which are often added to the original loan.

Comparison interest rate

As we touched on above, the comparison interest rate takes into account any charges and additional fees associated with different types of finance. The following information shows how setup fees are taken into account.

Example loan: One year $20,000 loan at 13% nominal interest rate
Set-up charge: $600
Total loan: $20,600
Interest: Charged annually
Interest paid: $2678
Total repaid: $22,678
Comparison interest rate: 13.39%

As you can see, the comparison interest rate is slightly higher than the nominal interest rate due to the setup charge. This rate is calculated by adding the setup charge to the initial loan then calculating interest based on the nominal interest rate. The interest is then expressed as a percentage of the initial loan, which does not include the setup charge.

How is interest calculated on your loan?

To simplify the above example, we have used a 12-month loan term with interest charged at the end of the period. In reality, there are several ways in which interest can be calculated, such as quarterly, monthly, weekly or even daily. How interest is calculated on a loan will determine what is known as the periodic interest rate. This is effectively the rate after taking into account interest on interest. Let us explain further…………

To calculate the periodic interest rate, you first need to work out the periodic rate. For example, if interest were calculated quarterly and added to the loan balance, the periodic rate would be four (i.e. four interest charging periods per year). If it was monthly, the periodic rate is 12, weekly would be 52, and daily would be 365.

Calculating the periodic interest rate

In order to calculate the periodic interest rate, the comparison interest rate is divided by the periodic rate. This calculates the comparison interest rate for each charging period. Using the above example, the quarterly periodic rate would be 13%/4 = 3.25% per quarter. This rate is then multiplied to the power four to calculate the effect of interest on interest (as interest is added quarterly). As you can see below, the periodic interest rate is higher than the comparison interest rate.

Quarterly periodic interest rate

Periodic rate: 0.13/4 = 0.0325 (3.25% per quarter)
Periodic interest rate calculation: 1+0.0325 ^4 = 1.136476
Periodic interest rate: 13.6476%

Monthly periodic interest rate

Periodic rate: 0.13/12 = 0.010833 (1.0833% per month)
Periodic interest rate calculation: 1+0.010833 ^12 = 1.138032
Periodic interest rate: 13.8032%

Weekly periodic interest rate

Periodic rate: 0.13/52 = 0.0025 (0.25% per week)
Periodic interest rate calculation: 1+0.0025 ^52 = 1.138644
Periodic interest rate: 13.8644%

Daily periodic interest rate

Periodic rate: 0.13/365 = 0.000356 (0.0356% per day)
Periodic interest rate calculation: 1+0.000356 ^365 = 1.138802
Periodic interest rate: 13.8802%

While the increase in the periodic interest rate may seem reasonably subtle, it can convert to significant additional payments on large loans over a long period of time. Therefore, it is essential to know how the interest is charged on loans before signing an agreement.

Average finance interest rates

We will now look at some of the more common types of finance and the average interest rates available at this moment in time.

Mortgage interest rates

According to the Reserve Bank of New Zealand, as of January 2022, average mortgage rates for new customers in New Zealand stood at:-

• Floating rate 4.91%
• Six-month rate 4.46%
• 12-month rate 4.18%
• 18-month rate 4.47%
• Two-year rate 4.71%
• Three-year rate 4.96%
• Four-year rate 5.25%
• Five-year rate 5.42%

As you can see, there is an expectation that the New Zealand official cash rate will increase in the coming years.

Business loans

In New Zealand, the base lending rate is the average rate at which commercial banks lend money to new businesses. This gives you an idea of the commercial lending market. Using information from the Trade Economics website, we can plot the recent trend:-

September 2021, 8.41%
October 2021, 8.55%
November 2021, 8.61%
December 2021, 8.68%
January 2022, 8.73%

This rising trend in the base lending rate is indicative of the increase in the official cash rate, which is expected to increase further during 2022.

Personal loans

Here at Quick Loans, we provide a range of loans to customers who may have difficulty obtaining traditional finance. All of our loans are secured with interest rates ranging from 9.95% to 23.95%, dependent upon the individual’s financial status. As a responsible lender, we will only offer finance that is affordable to the client. If a loan is not the best course of action will be honest and upfront and inform you accordingly. There is no benefit, to the client or us, in recommending finance which is, to all intents and purposes, unaffordable.

Positioned just between the traditional banks and the payday lenders, we offer competitive rates for those who have experienced financial difficulties. As we are not a bank, we see customers as individuals and all applications are assessed manually. A decision will be made within 60 minutes of your application and, for successful applicants, funds will be available within 24 hours.

New Zealand official cash rate

There is still a degree of uncertainty regarding the Covid pandemic and its impact on business in the short to medium term. However, the New Zealand official cash rate trend has recently turned upwards.

The official cash rate has been used as a means of cooling down the economy, which will help reduce inflation – currently a huge worldwide problem. To say we are in uncharted waters is an understatement. One hand, increasing interest rates too quickly will starve the economy of much-needed finance. On the flipside, if interest rates are increased to slowly this will fuel consumer spending and encourage further inflationary pressure. Consequently, central banks worldwide are taking a cautious approach to interest rates.

Conclusion

There are many factors to consider when looking at New Zealand interest rates. First and foremost, money markets are heavily influenced by the New Zealand official cash rate. Secondly, the individual financial status of clients/businesses will dictate whether finance is made available, and if so, at what interest rate. Finally, the duration of any loan is also significant. This can help to spread payments over a greater period, sometimes removing an element of financial pressure in the short term.

While many people feel a natural pull towards paying off their debts as “quickly as possible”, very often, this does not leave any room for unexpected financial hits. Consequently, it is better to err on the side of caution and give yourself a degree of “headroom” in the event of unforeseen issues in the future.

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