What is an adjustable-rate mortgage (ARM)?

An adjustable-rate mortgage (ARM) starts with a fixed interest rate for an initial period (typically 1, 2, 3, or 5 years), after which the rate resets periodically based on a reference rate plus a margin. In New Zealand, floating and revolving credit home loans work on a similar principle: the lender sets the floating rate and can adjust it in response to official cash rate (OCR) changes. A true ARM is more commonly seen in the US market, but New Zealand borrowers encounter adjustable rates through floating-rate and revolving credit facilities.

How do ARM rate caps work?

Rate caps limit how much an ARM's interest rate can change. There are typically three caps: (1) the initial adjustment cap, which limits the rate change at the first reset (often 2% to 5%); (2) the periodic adjustment cap, which limits changes at each subsequent reset (often 1% to 2%); and (3) the lifetime cap, which limits the total increase over the life of the loan (often 5% to 6% above the initial rate). Caps protect borrowers from extreme payment shock but do not eliminate rate risk entirely.

Is an ARM cheaper than a fixed-rate mortgage?

An ARM usually offers a lower initial rate than a long-term fixed loan, which reduces early payments and total interest during the fixed period. Whether it ends up cheaper overall depends on how rates move after the initial period. If market rates fall or stay flat, the ARM can save a significant amount. If rates rise sharply, the ARM may cost more than a fixed-rate loan over the full term. Borrowers who plan to sell or refinance before the first reset often benefit most from ARM products.

ARM Mortgage Calculator

Work out how your repayments change when an adjustable-rate mortgage (ARM) resets after its initial fixed period. Enter your loan details, the rate you expect after the first reset, and the periodic and lifetime caps. The calculator shows payments for every year of the loan and compares total interest against an equivalent fixed-rate mortgage.

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Updated June 2026 Standard ARM amortisation formula. Applies to floating-rate and revolving credit home loans.

1. Loan Details

Loan amount

Loan term (years)

Initial fixed-rate period

Initial interest rate % p.a.

Repayment frequency

2. Adjustment Assumptions

Expected rate after first reset % p.a.

Rate adjusts every

Periodic cap max change per adjustment

Lifetime cap max total increase above initial rate

Comparison fixed rate % p.a.

Your ARM Mortgage Summary

Initial Payment

During fixed period

Payment After Reset
-
At expected adjusted rate

Total ARM Interest

Full loan term

vs Fixed Interest

ARM saving / extra cost

Year-by-Year Payment Schedule

Fixed-rate period Adjustable-rate period

Year	Interest Rate	Annual Payment	Interest Paid	Principal Paid	Balance Remaining

ARM Loan Breakdown

Loan amount-

Loan term-

Fixed period-

Initial rate-

Initial payment-

Adjusted rate (expected)-

Payment after reset-

Maximum possible rate-

Payment at max rate-

Total ARM interest-

Fixed-Rate Comparison

Fixed comparison rate-

Fixed monthly payment-

Total fixed interest-

Total ARM interest-

Interest difference-

Payment change at reset-

Payment at lifetime cap-

Summary: Enter your loan details above.

How an Adjustable-Rate Mortgage Works

An adjustable-rate mortgage (ARM) has two distinct phases. During the initial fixed-rate period, your interest rate and repayment are locked in, just like a fixed-rate loan. Once this period ends, the rate resets based on a market reference rate plus a lender margin, and then continues to adjust at set intervals (for example, every 12 months) for the remainder of the term.

In New Zealand, the closest equivalent to an ARM is a floating-rate or revolving credit home loan, where the rate moves with the official cash rate (OCR) and can change at any time the lender chooses. Many NZ borrowers also roll short fixed-rate terms (for example, fixing for one or two years at a time), which produces a similar effect to a traditional ARM once each fixed term expires.

The Standard ARM Payment Formula

Each time the rate resets, your new monthly payment is recalculated on the outstanding loan balance with the new rate for the remaining term. The standard mortgage payment formula is:

P = L x [r(1+r)^n] / [(1+r)^n - 1]

Where P is the periodic payment, L is the outstanding loan balance at the reset date, r is the periodic interest rate (annual rate divided by the number of payments per year), and n is the number of remaining payments. This calculator applies this formula at each rate adjustment point.

Rate Caps Explained

Cap Type	What It Limits	Typical Value
Initial adjustment cap	Rate change at the very first reset	2% to 5%
Periodic adjustment cap	Rate change at each subsequent reset	1% to 2%
Lifetime cap	Total increase above the initial rate, ever	5% to 6%

This calculator uses a single periodic cap (applied at every adjustment, including the first reset) and a lifetime cap. If you want to model a separate initial cap, simply enter it as the periodic cap.

Worked Example

Default inputs: $600,000 loan, 25-year term, 2-year initial fixed period at 5.99% p.a., adjusting to 6.99% p.a. after reset, with a 2% periodic cap, 5% lifetime cap, monthly repayments, and a 6.49% fixed-rate comparison.

Initial monthly payment: $3,862 at 5.99% (25 years, 300 periods)
Balance remaining after 2-year fixed period: approximately $577,949
Payment after reset: $4,215 per month at 6.99% for the remaining 23 years
Maximum possible rate: 10.99% (5.99% + 5% lifetime cap)
Total ARM interest (if rate stays at 6.99% after reset): approximately $656,020
Comparison fixed at 6.49%: monthly payment $4,047, total interest approximately $614,248
In this scenario, the ARM costs approximately $41,772 more in total interest than the fixed rate, because the adjusted rate (6.99%) is higher than the fixed comparison rate (6.49%).

ARM vs Fixed Rate: When Each Makes Sense

An ARM may suit you if you plan to sell the property or refinance before the first rate reset, because you capture the lower initial rate without ever facing the adjustment. It may also suit borrowers who expect market interest rates to fall, because each adjustment could bring a lower payment. A fixed-rate loan provides certainty: your payment does not change regardless of what happens to the OCR or market rates, which can be valuable for budgeting.

Related Calculators

Mortgage Calculators: full hub of NZ home loan tools.
Mortgage Repayment Calculator: standard fixed-rate payments.
Mortgage Interest Rate Comparison Calculator: compare two rates head to head.
Mortgage Extra Repayment Calculator: see how extra payments cut your term.
Mortgage Refinance Calculator: work out whether refinancing saves money.

Sources and method: Standard mortgage amortisation formula (P = L x [r(1+r)^n] / [(1+r)^n - 1]). Rate cap structure based on conventional ARM definitions. NZ floating-rate context based on Reserve Bank of NZ (RBNZ) official cash rate framework (rbnz.govt.nz). This calculator is indicative only and does not constitute financial advice. Actual loan terms, rates, and caps vary by lender. Consult a registered financial adviser or mortgage broker for personalised advice.