Understanding home loan interest rates
Last updated: 07 July 2025 | Estimated read time: 5 Minutes
When choosing a home loan, it is important to find the right interest rate option to suit your situation. But with so many offers available from so many lenders, finding the right one can be overwhelming.
How do interest rates get set, what are the different types and why are they different? Here we provide a guide on interest rates to help you be better prepared for the homebuying process.
How are interest rates decided?
The big influencers on interest rates are:
1. What it costs the lender to offer you a loan
Just like most things that are sold, money comes with a cost for the lending organisation. In New Zealand, these ‘wholesale’ costs of money – for all lenders – are set by a number of factors, local or global.
Each lender’s funding costs are different. This explains why there are different interest rates from different lenders.
One of the main factors that influence a lender's decision on customer rates is when there’s a change in the rate that banks and professional investors charge to lend each other money. This is called the BKBM (Bank Bill Benchmark Rate). This is part of the reason why interest rates don’t always change when the Reserve Bank of New Zealand's cash rate changes. Other factors can include overall business performance, competitive position in market, and changing economic conditions.
When the cost associated with a customers’ loan changes, the lender will often review the rate that the customer is paying and may increase or decrease the customers’ rate accordingly.
2. The 'risk' to the lender
The other important consideration around how home loan interest rates are set - and another key reason they will vary - is the risk of lending money to a particular customer. Higher risk will often result in a higher rate. The type of things a lender looks for to decide how risky a loan might be are things like the amount of money someone has put into a property versus how much they are wanting to borrow – called the Loan to Value Ratio (LVR).
LVR gives lenders a good idea of the potential risk of lending to them. Generally the more money a person has saved towards buying a house, the lower the risk – which is why saving a good-sized deposit can be important.
Lenders will also look at a person’s ability to repay the loan, by checking key things like previous credit history and current financial situation. This type of overall responsible lending assessment will be used to decide whether a loan can be offered, and at what interest rate. At Pepper Money we use a form of risk-based pricing. This process of personal assessment and pricing is what makes us different to the traditional lenders and allows us to provide loan options to help a wide range of people. Pepper Money, like all lenders, ensures that it completes a responsible lending assessment that ensures that the customer can afford the proposed loan without suffering financial hardship.
What are the different types of interest rates?
There are two types of interest rates – fixed and floating.
Fixed Interest Rates
Floating Interest Rates
How to reduce interest charged on your mortgage?
One way to reduce monthly interest charged on your mortgage is to utilise your offset or redraw accounts, as money held in these accounts will reduce the balance that interest is charged on every month. Say you have a $500,000 mortgage balance and have $10,000 in your redraw account. This would generally mean that your monthly interest is only being calculated on a balance of $490,000. However, not all offset and redraw accounts are equal - while some are free, others come with a monthly fee, so be sure to weigh up the benefits to ensure it's right for you.
Where can I get more information?
Remember there are no silly questions. Always ask. Here are some quick tips:
- Ask the specialists. Reach out to a broker in your area who can take you through the process and explain everything along the way or get some advice from a licenced financial or tax adviser.
- Get some insights from your own networks. Ask your family and friends for their experience with the lenders you're looking at. You may not have dealt with them before, but others may have.
- Check for their reviews online. Get a quick overview of how different lenders compare by visiting online comparison sites such as Canstar or MoneyHub NZ.
Want to find out where you stand? Calculate your Borrowing Power.
Need some help with your home loan?
Whether you’re unsure of the purchase process, wondering what LVR means, or are looking for help along the way, our resources are here to help make sense of all that finance jargon.
You are protected by responsible lending laws. Because of these protections, the recommendations given to you about home loans are not regulated financial advice. This means that duties and requirements imposed on people who give financial advice do not apply to these recommendations. This includes a duty to comply with a code of conduct and a requirement to be licensed.
Applications are subject to credit assessment, eligibility criteria and lending limits. Terms, conditions, fees and charges apply. Information provided is factual information only and is not intended to imply any recommendation about any financial product(s) or constitute tax advice. If you require financial or tax advice you should consult a licensed financial or tax adviser.
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All loan applications are subject to Pepper Money completing responsible lending checks and considering an applicant's individual circumstances.
