In our January update we discuss the possibility that we will see interest rates increase in 2026.
It seems to be universally agreed by most economic commentators that interest rates are going to increase in 2026. The question is therefore not if interest rates will increase, but when will they increase?
Will 2026 be a better year?
Kiwis must know that there have been ongoing concerns about the economy’s sluggish performance.
There was a lot of optimism for 2025, but that did not eventuate.
The economy was trying to come out of the recession, but it never really gained momentum. At the start of the year it was a bit of a shocker, and then by the end of the year there were some signs of improvement.
But now for 2026, most people are expecting that the economy has turned the corner and will start improving.
We don’t really expect the economy to boom, but we will take any improvements that we can!
The economy affects us all
One of the issues with the economy that we have seen, and probably will continue to see, is it’s not going to be an across the board improvement. We have seen some sectors doing well and some not so well, but the expectation for 2026 is we will see more sectors of the economy will start improving.
The good news is we’re starting to see confidence as well, and that means businesses will invest and people will start spending.
That by itself should filter through to a lot more industries, including food and entertainment. Overall, people feel better and households have a better lifestyle when the economy’s doing well.
Kiwi Edition is constantly watching what happens in the New Zealand financial markets and we’re sure the current government will want to see the economy improving, especially given it’s an election year.
What about interest rates?
So what does this mean for interest rates?
When the economy starts picking up, the Reserve Bank no longer needs to drop interest rates in an effort to stimulate the economy. The talk is more about if there’s a need to be increasing interest rates to hold back inflation within the 1% to 3% band.
Most economists are predicting interest rate increases in 2026, but not significant increases, and possibly not till later in the year.
What about the home loan?
A lot of people are starting to ask what they should be doing with refixing their home loans.
Mortgage managers have been working with lots of clients on refixing home loans, and rather than the short-term refixes that have been promoted by many of the banks and other mortgage advisors, the recommendation is to establish or go back to your strategy and refix at least some of your mortgage for longer periods.
Remember that fixed rates are lower than floating rates and the longer term fixed rates give you some certainty. If you’re risk adverse, then fixing some of your mortgage for five years is a pretty good option. It gives you some certainty around rates for a decent length of time, and if you retain some of your mortgage on the one and two-year rates, you therefore have flexibility as well.
Offsets are becoming a lot more popular. Whereas previously a lot of people used revolving credit loans (like a large overdraft) now more people are moving to an offset loan, which enables you to link multiple bank accounts to your mortgage to offset the interest. It’s a clever way to manage your money better, and gives you some really good savings if managed properly.
Unfortunately, not all banks offer an offset home loan, but it’s certainly something that you should consider if you’re looking to refix.
Increase your repayments this year!
The other issue that is often overlooked is the ability and the impact of paying extra on your fixed loans. Most banks allow you to pay more than the minimum repayment on your fixed loan, with some banks enabling up to 20% more, whereas other banks it might be a fixed dollar amount.
It’s important that you understand what options your bank give you, but also you need to manage the risks associated with paying extra. For example, if you pay extra on an ANZ home loan, you will be shortening the loan term, which all sounds good until interest rates increase. ANZ do not automatically let you revert to the original loan term, and therefore, if interest rates increase, you can get stung with increased repayments that could easily be unaffordable. If you have an ANZ home loan, then you need to talk to your mortgage advisor about how to structure it so that you can take advantage of the extra that you can pay without getting yourself trapped when interest rates do increase.
Let’s Get Organised Today
Let’s round this off by saying, we’re recommending that you establish or revert to a good mortgage strategy.
That should include having some flexibility in your loan by using a revolving credit or offset account, and then splitting your home loan, potentially with some over the longer five-year period, to give you that extra certainty.
It’s important that you understand what flexibility you have within your fixed home loans and try to round your payments up a bit, remembering that every extra dollar that you pay on your home loan goes straight off the principal. It means you can save a lot of money in the long run. It’s definitely something worth doing, especially while interest rates are at the current levels.
It’s always harder to pay extra on your home loan when the interest rates increase so try to make the most of the low rates that we have now.
If you have any other short’s term debt, then have a look at that and see whether that can be refinanced into the mortgage to get the lower interest rates. But try not to extend the term that you’re paying it off over.
Also, if your equity in the property is under 20%, then set yourself a goal to try and get 20% equity in your property so that you can take advantage of the special rates on offer.
The team at Mortgage Managers are here to help establishing goals and give you some tips on how to manage potential interest rates increase and how to achieve those goals for 2026.
