Had the same buyer always chosen five-year deals, they would have paid the higher figure of $237,281 in interest over the past 20 years.
The six-month fixed rate was revealed as the second cheapest with $207,720 paid in interest, followed by the two-year rate with $214,184 interest paid.
Then came the four-year rate ($223,061), three-year rate ($224,819) and floating rate ($231,838).
Economics expert and Herald business editor-at-large Liam Dann said the one-year rate has likely been the best pick because the past 20 years have been a time of “historically low interest rates”.
“That may have meant that it has been better value to stick closer to where the market action is, which is shorter interest rates,” he said.
The historically low interest rates over the past 20 years have largely been in response to the Global Financial Crisis (GFC) and the Covid-19 pandemic, Dann said.
So people who locked in longer fixed rates after the GFC, expecting interest rates to climb again, may have been caught out by the unusually long period of low rates that followed.
And although most market commentators and economists now expect a “return to normal” with longer stretches of higher interest rates in the coming years, “there is no guarantee that will happen”, Dann said.
“You could have another market crash or another geopolitical event that suddenly forced rates back down to low levels,” he said.
That means it is hard or near-impossible to accurately predict what will come next.
“So it’s not surprising to me in that sense that you might pay a bit more for longer fixed rates because what you’re paying for is the privilege of knowing exactly what you will be paying for a long period of time,” Dann said.
How the one-year rate came out on top: a year-by-year analysis
Explore the graphs below to see exactly how the one-year rate proved the cheapest.
You can find how much interest was paid on each fixed rate, how much of the original loan still needs to be paid, and how the interest rates and monthly payments changed over time.
Click and hover over the graph’s data points to explore the details and hit the pause button if you want to spend longer looking at a slide.
The calculations are based on:
- A $248,000 house price, which was the median sale price of a New Zealand home in 2004, according to property analysts Valocity
- A $198,400 loan using a 20 per cent deposit of $49,600
- A 30-year loan period - the most common choice among buyers
- Historic interest rate data from the Reserve Bank of NZ that we’ve averaged where necessary
- A home buyer choosing the same type of fixed interest rate each time their mortgage came up for renewal. For example, always choosing a one-year fixed rate, or always choosing a five-year rate.
Did you buy in 2020? Then four- and five-year rates were best
There are exceptions to every rule, of course.
And a home buyer’s best choice over the past four years would’ve been to lock in a four- or five-year fixed rate.
Take the example of a home buyer purchasing a median-priced Auckland home in 2020 for $925,800, according to Valocity data.
With a 20 per cent deposit they would have then borrowed $740,640 from the bank.
Choosing a four-year deal at 4.16 per cent interest, they would have gone on to pay $118,865 in interest over the past four years.
That’s about $23,000 less than a buyer choosing one-year fixed rates, who would’ve paid $141,802 in four years as their interest rates changed from 3.72 per cent in 2020, to 3.48 per cent, 5.39 per cent, and 7.36 per cent in the following years.
It shows that while no one knows exactly what will happen in the future, guesswork can sometimes pay off.
That’s especially the case for anyone who locked in a four- or five-year deal in 2020 or 2021, believing interest rates would soon jump up from the record lows they had plunged to at the start of this decade.
Everyone agrees: The best way to save money is to pay your loan faster
The final example, however, shows the most important way to save on your mortgage is to pay your loan back as fast as possible.
The Herald analysis shows the same home buyer from earlier - who paid $248,000 for a house in 2004 and fixed on one-year rates each year - could have saved more than $45,000 by choosing to pay off their loan in 20 years rather than 30.
Paying the loan in 20 years means they would’ve had to make higher monthly payments - an average of $1491 per month on the 20-year term compared to $1238 on the 30-year term.
Yet in the long run, they would’ve paid less.
At the end of two decades on the 20-year term, the buyer would have completely paid off their $198,600 loan, while also paying a total of $159,443 in interest.
By contrast, if the same buyer chose a 30-year term, they would’ve spent $204,225 on interest by the end of two decades.
Worse, they would also have paid back only $92,776 of their original loan.
That means they would still have to pay more than $100,000 extra towards their loan, while continuing to fork out interest payments for another 10 years.
To state it even more clearly, not only has the buyer on the 30-year term paid $45,000 more interest than the buyer on the 20-year term, but they’ve still got 10 more years of interest left to pay.
The article is for informational purposes only and does not constitute financial advice or take your personal circumstances into account. If this is what you require, please seek the advice of a trusted financial professional.
