Mortgage brokers say unless borrowers have around three months or less to go on their fixed term, the savings on a lower home loan rate are unlikely to outweigh the break fee cost.
Fixed mortgage rates have dropped to all-time lows in recent weeks with borrowers able to nab 2.65 per cent over one year and 2.69 per cent fixed over two years.
That makes it tempting for those who fixed their mortgage in the high 3s to break the term and nab a lower interest rate.
But it's not that simple, mortgage brokers say.
• Fixed mortgage rates: Should you break them?
• Investing in mortgages grows in popularity
• Mortgage wars: Where you can find the best deal to buy a home in New Zealand
• Mortgage lending recovers, banks remain ultra-cautious
"It is very rare these days for it to make financial sense to break a loan," says John Bolton, head of Squirrel Mortgages.
Bolton says rates falling to new lows won't help people who fixed a year ago when they were around the high 3s or early 4s.
"Rates going lower just makes it worse for them.
"My advice is you have just got to hang out and wait for your fixed rate to roll over."
Break fees are calculated using a complex formula which is slightly different for each bank.
It basically works out how much a bank will be out of pocket by not having the interest you agreed to pay them as part of the fixed term agreement.
Banks are not allowed to make money off break fees but are allowed to ensure they aren't out of pocket.
Borrowers can find out exactly what the break fee will be by contacting their bank although mortgage brokers and interest.co.nz offer break fee calculators that can give a guide.
Then you will need to work out how much interest you will be saving by using a mortgage calculator like the one on the Government-backed money education website sorted.org.nz.
Karen Tatterson of Loan Market, said it only made sense to break a loan if a person had a really short term to go.
"Most people looking at the break fees find they are prohibitive compared to the interest they are saving."
Tatterson said exactly what timeframe that was depended on the bank.
"It's usually around three to six months."
According to Reserve Bank data New Zealanders had $241 billion out of the $284 billion of the money borrowed from banks against residential property on a fixed term in May.
For owners occupiers $61.6b out of $173b is fixed between one and two years and a further $55b was fixed between six months and a year.
That means around two thirds of New Zealand's owner occupier bank home loans are fixed for between six months and two years.
Many borrowers have been using six month home loan terms instead of the floating rate in recent years because floating rates have remained much higher than fixed term rates.
Kiwibank dropped its floating rate to 3.4 per cent last month but none of the other major banks have followed suit.
Even that floating rate remains much higher than the 2.65 per cent many banks are offering for one year fixed.
Tatterson said given there was an expectation that rates could fall further she doesn't recommend people lock in rates for longer terms.
"When you look at where the market is sitting it would be unwise to take a long term rate.
"I personally wouldn't fix for more than a year in this market."
The official cash rate is at 0.25 per cent and there is some expectation that the Reserve Bank could take it negative next year.
Reserve Bank governor Adrian Orr has said he would like to see mortgage rates head lower.
Tatterson says she wouldn't be surprised to see mortgage rates head down to around 2 per cent.
First home buyers and expats
Outside of those looking to re-fix their existing loan, brokers are reporting strong interest from the first home buyer market and expats returning to New Zealand looking to buy a home.
Bolton said the first home buyer market was crazy busy.
"We have probably had a 300 per cent increase in cases coming through - and that is really high."
He said housing turnover in Auckland had been low for some time with about a 30 per cent reduction in the volume of house sales before Covid.
"In a way that is why you haven't seen a profound effect from Covid."
He said Auckland had a lot of pent-up demand and the low interest rates had "doused a bit of fuel on it" and bought it back to life again.
Bolton said interest rates were so low it was cheaper to buy than rent.
"People are looking at it and thinking "s**t" at these rates I should buy."
"I think interest rates are a huge driver and the perception they can get a good deal."
But he said there would also be a bit of disappointment for first-home buyers.
"The problem with the first-home buyers is that they are all very driven by sentiment and confidence. They tend to run in and out of market as a pack. They all flood in or out."
They were all competing for the same houses with very limited stock and were typically looking for houses up to $800k.
Bolton said returning Kiwis were being quite active as well and were coming back with quite a bit in deposit funds.
They were looking to buy in the $1.5m to $2m price band, he said.
But he said that credit was tighter than ever.
"It will probably be like that for another three or four months until we get through these mortgage deferrals. Until the banks get confidence the market is stabilising they are going to be very reluctant."
Bolton said banks were only comfortable doing low-deposit lending if the borrowers had high job stability.
"They want you to be in job for a year and in the industry for at least five years with a good surplus income."
High bar remains
Brokers say the servicing tests at banks remain around 7 per cent despite the rates falling so low.
"That is really tough. That's particularly tough for people trying to borrow more money. That is probably the thing that holds people back," Bolton said.
Tatterson said banks were being very strict.
"They are conscious of not putting people into financial hardship."
"It is the hardest it has ever been."
She said there was plenty of queries coming though with a variety of applicants from first home buyers to upgraders and downsizers.
She was also seeing people want to do renovations - borrowing an extra $20k to $50k.
But instead of being able to just top up the mortgage they have to go through the full loan application process.
She said loan applicants had to explain the impact of Covid and where they were at now.
Tatterson said many people thought it would be easier to borrow money with loan to value ratio restrictions on the banks being dropped by the Reserve Bank.
"It hasn't really made a difference. It's had no impact at all which is really sad."
She said the hardest thing was seeing people paying rent that was equivalent to a mortgage but were unable to get a home loan because their deposit was too small.
Tatterson said banks should bring down their service testing levels - particularly for first home buyers.
"It should be around 5.5 to 6 per cent rather than around 7 per cent."