Test Interest Rates continue to drop

Competition is brewing, and excitement is rising with major NZ banks continuing to lower their testing rates. 

As published in the latest Financial Stability Report Nov 24, the Test Interest Rates that lenders use to asses borrowers debt-servicing capacity have fallen from an average 9% to 8% in October. Westpac, ANZ and Kiwibank were quick to reduce their home loan test rates after the Reserve Bank cut the Official Cash Rate (OCR) in October, and now ASB and BNZ are following suit, cutting their mortgage serviceability test rates.

Banks typically apply a buffer above the average 1-2 fixed mortgage rate, although there is some variation in methodology, explains the Reserve Bank of NZ. Banks generally review their test rates each quarter, but are doing so more frequently now due to recent monetary policy changes and to remain as competitive as possible to borrowers.

Correct as of 29/10/24, the main NZ bank test rates are as below.

Source: https://www.interest.co.nz/banking/130441/asb-and-bnz-follow-lead-new-zealand%E2%80%99s-other-major-banks-cutting-mortgage

View the latest NZ Banks Latest Mortgage Rates

With reducing rates, borrower’s ability to take on more debt could increase quickly given the recent reductions in monetary policy, and banks will be facing strong competition to attract a limited pool of creditworthy borrowers, the RBNZ believes.

What do lowering test rates mean for buyers?  

Lower testing rates may make it easier for potential borrowers to qualify for loans. This can encourage more people to apply for mortgages or other types of loans, potentially boosting housing market activity.

• Increased Affordability: With lower testing rates, borrowers might find that they can afford larger loans or mortgages, as their assessed repayment capacity improves. This could lead to higher demand for properties.
• Market Competition: Banks could be reducing their testing rates in response to competitive pressures in the lending market. By making it easier for customers to qualify, banks can attract more business.
• Economic Signals: This move might signal that banks are anticipating a more stable economic environment or that they want to support growth, especially if other indicators suggest a slowing economy.
• Risk Considerations: While lower testing rates can stimulate borrowing, they may also raise concerns about lending standards. If banks lower their criteria too much, it could increase the risk of defaults in a downturn.

Use our Mortgage Calculator to work out how different mortgage rates might affect your monthly mortgage repayments. If you want to speak to a Financial Adviser and see if you can restructure your loan to improve your serviceability, get in touch today. We are happy to have a no obligation call to chat through potential options.