What Happens to Your Mortgage When Interest Rates Rise?
What Would a 1–2% Rate Rise Actually Cost You?
Most people know that interest rates move up and down over time, but very few actually know what that means for their own mortgage in dollar terms.
When you apply for a mortgage in New Zealand, your bank runs what's called a stress test. They check whether you could still afford your repayments if rates were higher than what you're actually being offered. It's a sensible check, and it protects both you and the bank.
But here's the thing. Once your loan settles, nobody shows you that number again. You're just left paying your current rate, with no real sense of what a change would actually do to your weekly or monthly budget.
That's worth fixing, because over the life of a mortgage, you will almost certainly see your rate go up at some point, and down at another. That's not a sign anything has gone wrong. It's just the normal rate cycle.
A Real Example:
Let's say you've got a $500,000 loan, on a 30 year term, currently sitting at 5%. Your repayments would be around $2,685 a month.
If your rate went up 1%, to 6%, that repayment climbs to roughly $2,995 a month, about $310 more.
If it rose 2%, to 7%, you'd be looking at closer to $3,325, around $640 more.
Notice those numbers aren't perfectly even steps. A little more of a jump between 6% and 7% than between 5% and 6%. That's just how loan repayment maths works when you're paying down principal as well as interest, not something to worry about, just useful to know.
How This Actually Works:
If you're on a fixed rate, your rate doesn't move during the term itself, that's the whole point of fixing. What actually happens is your fixed term expires, and you're offered a new rate at whatever the market is sitting at then. That new rate could be higher or lower than what you were on, and that's the "rate rise" this post is really talking about.
If you're on a floating rate, or you've got a revolving credit or offset facility, that's a different story. Those rates can move at any time, your bank can adjust them whenever the market shifts, without waiting for a term to expire. So if part of your lending sits in one of these, it's worth checking that portion specifically, since it behaves differently to your fixed portions.
Why This Is Worth Checking Now:
If you're partway through a fixed term, there's no urgency, your rate won't move until you refix. But if you're coming up for a refix soon, or weighing up whether to fix for six months or two years, having a real sense of what a rate movement would do to your actual budget makes that decision a lot less stressful down the track.
It's also just useful for peace of mind. A lot of the stress around interest rates comes from not knowing, from a vague sense that "if rates go up I'll be in trouble" without any real number attached to it. Once you can see the actual figure, it's usually a lot less frightening than the uncertainty was.
Try It Yourself:
I've built a free Rate Stress Test tool that does exactly this calculation for you. Enter your loan balance, your current rate, and your term, and it shows you what your repayments would look like at 1% and 2% higher and lower, for both principal and interest and interest only lending. It takes about a minute.
Run your own numbers here: Rate Stress Test tool
If the number surprises you either way, that's exactly the kind of thing worth talking through properly. Get in touch and we can look at what it actually means for your situation.
