When your fixed rate mortgage comes to the end of its term, most lenders (banks) will offer you a new fixed rate or automatically roll the loan onto a floating rate.
As a homeowner, this type of fix-and-forget arrangement might sound convenient, but it also means you could miss out on the opportunity to refinance your mortgage – which can potentially save you significant amounts of money in the long-run or offer other benefits.
Rather than just taking the rates they offer, it could be a great idea to shop around. Refinancing a mortgage can be more complex than it might first seem. Making the right decision takes time, research, and a good amount of forward-planning.
Refinancing is the process of transferring your existing home loan from one bank to another. When you refinance, you’re essentially repaying your existing loan, then taking out a new loan at a different bank.
It’s important to understand refinancing isn’t just about interest rates, it’s also about the bigger picture and overall benefits. These might include:
• locking in a more competitive interest rate. Lowering your mortgage's interest rate can reduce your monthly payment if the repayment term (duration) remains the same.
• taking advantage of another bank’s products or services
• reviewing your loan’s structure
• to get a better overall deal, especially if your personal situation has improved. If you've had a significant pay-rise, received an inheritance, or have better mortgage affordability generally, you will likely be able to negotiate a better mortgage deal
• reduce the term of your mortgage. If your finances allow for a few hundred dollars every month to go towards your mortgage, rather than overpay and incur fees, refinancing with a shorter term and lower interest rate will reduce the overall cost of the mortgage
• consolidate other debts
• borrow more money, to fund something like renovations, an investment property, a holiday, or something else
The best time to think about refinancing is towards the end of your current loan’s fixed rate term, or if your financial circumstances have changed. Perhaps your income has significantly increased, or you’re looking to borrow more to buy a new house or investment property.
Inflation is still NZ’s financial public enemy number one. To tame inflation, the Reserve Bank of New Zealand is increasing interest rates.
It’s hard to talk about mortgages nowadays without making mention of inflation and interest rates.
In years gone by, fixing for the lowest-cost shorter terms, such as a year, and subsequently rolling fixed-term mortgages has been a good strategy. However, for those running this strategy, the prospect of higher future rates should be budgeted for.
Fixing for some of the longer mortgage terms (perhaps five years) provides interest rate certainty for the next few years, but at a significantly higher cost than short-term rates. For those who want this longer-term interest rate certainty now, the cost of fixing for two to five years is still low compared to the average rates over the past twenty years. Many people also don’t split their rates across a variety of terms which can offer the best of both worlds with some certainty and some greater affordability
Nobody has a crystal ball, but most economic gurus seem to think interest rates will peak in late 2022 or early 2023, then ease back a little before settling at levels similar to now. That said, the typical response to unexpected events such as natural disasters has been to drop interest rates.
Your goals might be better achieved by staying with the same lender and instead restructuring or refixing. It’s important to make sure refinancing is the best solution.
Refinancing a mortgage can come with costs. These costs can include:
• legal fees
• early termination or repayment fees on your current loan
• any cash reward clawbacks (when you must return your cash rewards) from your existing bank, which is often for a 3-4 year period from when you took your lending out
Tally up every possible refinancing expense to make sure the benefits of switching outweigh the costs.
Once you’ve looked at your reasons and possible costs, it’s time to do some research.
It can be tempting to focus on rate-shopping, but always look past interest rates alone.
Some banks may have additional offers, such as cash contributions or no application fees, so it pays to compare more than just interest rates.
It’s also important to talk to your existing bank. Ask for a clear picture of any costs associated with early termination.
This is a great opportunity to talk about your financial goals and your reasons for refinancing.
(By researching competitors to your existing bank first, in steps two and three, you’ll go into this talk well-informed).
If you decide to go ahead with refinancing, here’s what generally happens next:
• You’ll fill out a loan application, provide bank statements, proof of income and anything else the bank requires.
• Your new bank will decide whether to approve the loan.
• If the loan is approved, the bank will send you a letter of approval outlining your new terms.
• You will decide on the new structure you want for your new home loan
• You’ll work with a lawyer to sign any necessary documents for the new home loan and provide them with a new insurance certificate showing your new bank
• Your mortgage will officially be refinanced.
Switching your home loan to a new bank is a big decision. So, if you’re thinking about home loan refinancing, be sure to weigh up all the pros and cons.