Change is constant. When you set up your mortgage originally, the interest rates were applicable to the housing market at the time. Likewise, the size and term of your mortgage was appropriate to your income and outgoings at that time. You had a new home, lots of set-up costs and were just finding your feet on the property ladder.
So much could have changed since then. Maybe you picked up a higher paying job, had to take unpaid leave or extended your family? Perhaps you need to finance renovations or extensions to accommodate a growing family? Or maybe you have seen an incredible offer from another lender that you simply can’t ignore?
There are a multitude of circumstances that may have changed, so reviewing your mortgage with the idea of refinancing helps your loan to evolve as you do.
What is mortgage refinancing?
Refinancing your mortgage is not simply changing the interest rate on your existing loan. It’s actually repaying your current mortgage and taking out an entirely new one with different (hopefully better) terms. You either work with your existing lender or switch to a new one – whichever has the better deal.
Mortgage refinancing is often confused with other mortgage changes, like refixing and restructuring. Refixing is the process of capturing a new interest rate for a specific period of time. Restructuring is about reviewing how your existing home loan works, then tweaking it to suit your circumstances. For example, you could move between floating and fixed, or you could off-set the loan against your savings or everyday account.
Why should you refinance your mortgage?
Researching whether it’s beneficial for you to refinance your mortgage takes time and effort. There will be fees involved and decisions to make. So, what circumstances could motivate you to start this process?
One reason is that lenders’ interest rates are constantly changing, in response to the money market. Keeping a close eye on rate changes yourself or working with an advisor could save you thousands of dollars. There are online mortgage calculators that you can use to compare your current mortgage (interest rates, term and value) to alternative deals with other lenders. These calculators can help you to understand the financial benefits you could gain from refinancing.
There’s also an unlimited number of other reasons and circumstances you may find yourself in, which could make you think about refinancing. Your current mortgage is set to a regular amount that you are expected to pay, at predefined rates, for a set amount of time. It’s possible this repayment amount is cramping your style or simply making life miserable. Or you might want to release some equity, so that you can improve or enlarge the property. Here are some examples of when your new circumstances might motivate you to find a new lender.
Your repayments are no longer affordable
Maybe you lost your job, got divorced, had a baby, paid for education, got sick or took unpaid leave to care for a family member. For various reasons, your income could have gone down or your expenses could have risen, or both. You can no longer afford the regular repayments you signed up to. Refinancing or restructuring could give you the option to get a better rate or make smaller repayments over a longer period of time.
Babies on the way
Dan and Georgia weren’t planning to start a family for a few years, but life threw them a curve ball. They have twins due in six months and that’s going to put a hole in their income. Initially, Georgia’s going to take a year off work. After that, they’re both hoping to reduce their hours, so that they can do plenty of active co-parenting. Their 1950s do-up is only half done up and their 15-year mortgage term is now looking like a major hurdle. By refinancing, they hope to shrink their repayments and free-up some money to complete essential baby-inspired renovations. Dan and Georgia don’t have a lot of time for doing all the figures, so they’re working with a mortgage broker to get the best-case scenario for them.
You’re getting the builders in
Your income increased
Congratulations! You got a promotion or started a new job, which has increased the amount of money you receive in your pay check. This is an exciting time, so using a mortgage calculator to see how you can shorten the term of your borrowing will come with waves of joy. Calculators will show that plumping up your repayments by even a small amount can cut months or years off the term of your loan. Higher repayments mean less interest and more principal every time you make a mortgage repayment.
Business going gangbusters
Jake and Tom are both life and business partners, and their enterprise is booming. In two years, their profits have doubled and there are contracts reaching into the future. Jake and Tom own a home together, which they bought five years ago. Back then, they could barely scrape a deposit together, so they picked a 30-year mortgage term to keep repayments low. Now they’re ready to cut their home loan term in half. They’re going to talk to their existing lender, as well as a couple of different banks. As business people, Jake and Tom are savvy; they’ll drive a hard bargain and pick the solution that’s most beneficial.
You’ve had a windfall
Perhaps a relative bequeathed you a tidy sum of money. Or you sold a business, property or an immensely valuable collection of art/stamps/bitcoin. Or it could be you received a bonus or ‘got lucky’ at Lotto. Whatever the reason, a windfall is to be celebrated and used wisely. Paying off a chunk of your mortgage is always a good idea. You have the option of breaking off with your lender or having a chat with your current lender (be sure to ask about any break fees or break costs). The lump sum will shorten the term of your loan, so you’ll be debt-free sooner.
Someone wants to share your debt
Maybe you found your forever partner, had a sibling/parent move in with you or want to split a property with a friend. Whatever the story, when someone else wants to contribute to the mortgage, and you think it’s a good idea, you may be able to increase your repayments. Your mortgage buddy might even have a lump sum to bring down your loan’s principal. With this change in circumstances, you could refinance your mortgage or restructure to a joint mortgage. It’s a time to shop around for a new lender and challenge your bank to step up with a great offer.
Flatmates become life partners
When Harry moved into Hazel’s house as a flatmate, they quickly became close friends. And then they became more than friends. Two years later, Harry and Hazel decided to tie the knot financially, by moving to a shared mortgage. Fortunately, the fixed mortgage for Hazel’s house was just coming up for renewal. A month before the rollover date, Harry and Hazel talked to the existing lender about their financial situation and a new loan. Their plan is to put the home into both their names, pay a lump sum off (Harry’s savings) and shorten the loan term.
Costs associated with refinancing
While refinancing or restructuring your mortgage can save you money, there are likely to be fees associated with the process, especially if you’re switching to a totally new bank or lender.
- Break fees – you currently have a mortgage agreement in place with your lender that will have had you paying interest on the loan in the future. To refinance, you will be breaking this agreement to start another, which means your current lender loses that forecast revenue. New Zealand law requires banks to provide an option for fixed rate contracts to be broken, but also allows them to charge a fee to recover costs. To find out what break fees or break costs will be involved for your situation, talk to your current bank or lender.
- Legal fees – you will need to work with your lawyer to get the mortgage changed. Lawyers never come cheap, but it pays to shop around. Some law firms specialise in conveyancing and have found ways to keep their fees affordable.
- Valuation fees – if you’re required to provide a current registered valuation of your property to your new bank or lender, you’ll have to dip into your bank account. A registered valuation generally costs at least $500. Always ask for a quote before you commit.
- Repayment of original mortgage incentives or rewards – your original mortgage may have come with bells and whistles, like a lump of cash, large piece of whiteware, new smartphone or a giant television. It’s highly likely an incentive will need to be repaid or returned. Check the fine print of your offer.
When is the best time to refinance or restructure?
The ideal time to refinance is when the financial gain or relief makes it worth it. You can check out other lenders before your current fixed rate mortgage comes up for renewal or rolls over. Or you can move quickly, because circumstances or your financial situation make it necessary. Have a couple of strategies in mind, then talk to existing and potential lenders or a mortgage broker. If you work with a chartered accountant, share your ideas with them. Talking to a financial expert who has nothing to gain can be illuminating.
Should you consult a mortgage broker?
Working with a mortgage broker can sometimes give you access to better interest rates than those publicly advertised. A broker works closely with multiple lenders, so knows what mortgage deals are available and which would be suitable for your situation.
An advisor also knows about the break processes associated with changing lenders. It’s useful to have someone who can explain confusing terms and answer your questions. After all, refinancing your mortgage is an important event that could potentially save you thousands.
Not all mortgage brokers are the same. They will have their own styles and approaches, have knowledge for different locations and deal with their own preferred lenders. It’s important to understand just which lenders the mortgage broker works with. You wouldn’t want this number to be too small, as it may limit what deals will be available to you. And you may want to check what costs are involved. Typically, mortgage brokers are paid by the lender when you take out a mortgage through them. But who pays for their time and effort if you decide not to get the new loan they recommend? Always read the fine print and ask questions.
How do you find a good mortgage broker?
If you don’t know any brokers, there’s a chance someone you know and trust does. Personal recommendations are always a good place to start. There’s also the Registered Financial Advisers list on the companies office government website. You’ll find general details of authorised financial advisers and what financial services they are registered for. And if you don’t fancy all that mucking around, try our free Find a Broker service.
How should you go about refinancing?
When you have done your research and are pretty sure you want to change lenders, pause for a moment to consider the costs.
- Reach out to your current bank or lender to find out about break fees and any incentives you are required to repay.
- At the same time, you could ask them what they’re willing to do to keep you as a customer. You might be pleasantly surprised!
- Ask your lawyer to estimate costs involved with new documentation.
- Call a registered valuer for the price of a valuation.
- Once you know all the costs, ask your new lender if they’ll contribute to some of the expenditure. Often, they’ll come to the party with a contribution.
Before you commit to a new lender, do a double check to make sure your decision is sound and get good financial advice. If you’re planning to switch lenders just to get a better rate, there’s a chance your current bank or lender will match that rate. These days, it’s perfectly normal to negotiate with your mortgage lender. If there’s another reason for making the switch, always give your current lender the chance to solve the problem or respond with an offer.
Once you’re double-sure moving lenders or switching banks is the best way to go, start getting your loan application information together. There will be the usual requirement for proof of income, bank statements, a household budget and credit check. Remember, the money is not in the bag until your new lender has approved the application.
Frequently asked questions
The main reason to refinance to a completely new home loan, with your current lender or another one, is to get a better deal. That usually means immediate or long-term benefits that will out-weigh any costs involved. Other than a lower interest rate, these benefits can often include a more suitable home loan product or structure than your current lender is able to provide. But sometimes people are just looking for better service.
Refinancing is often triggered by a change in circumstances that makes it a good time to review your home loan. For example, your income may have changed or become less regular, you may be starting a family or you might need to renovate. Any home loan review should include what other lenders have to offer. Using a good mortgage broker who represents most of the main lenders can save a lot of time and worry when it comes to shopping around.
The main downside of changing to a completely new home loan is the potential costs involved, plus updating any automatic payments or direct debits if you’re also switching your everyday banking.
If your current home loan is on a fixed interest rate, you might have to pay an early repayment penalty to cover your lender’s losses, particularly when market rates are lower than your rate. If you accepted an incentive payment from your current lender, you may have to repay some or all of it if you’re still within the agreement’s loyalty period. You’ll also need a lawyer to register the new mortgage on your property’s title. To top it all off, your new lender may want a registered valuation of your property.
However, in many cases a new lender will contribute to some of these costs and may also offer a substantial cash incentive to get your business – often up to 1% of your total home loan.
Refinancing means repaying your current home loan by taking out another one, which might be with a new lender. There’s no limit to how often you can refinance your home loan.
Most home loan specialists recommend reviewing your home loan annually or whenever your circumstances change. Any review should include the option of refinancing, if it provides the best deal or set up for your needs. A good mortgage broker can provide independent advice to help you choose the best possible deal.
When deciding whether to refinance or not, you should always look at the costs involved. These can include an early repayment fee if your home loan is still on a fixed interest rate. Other costs can include repaying an incentive reward that’s still binding, lawyer’s fees and a registered valuation of your property if the lender requires one. Another thing to keep in mind is that very frequent applications for loans or credit can sometimes reduce your credit rating.
Adjusting your home loan to ensure it still meets your needs is an important part of managing your finances. Most specialists recommend an annual review. In many cases your existing home loan set up can simply be optimised to get the right result.
However, sometimes the best solution is to take out a completely new home loan and use it to immediately repay your current one. This is known as refinancing. Your new home loan might be with your current lender or a new one; it just depends on who offers the best deal for your needs.
The best deal might involve a lower interest rate, a different repayment term or a loan structure that your current lender can’t offer. The gain just needs to outweigh the costs involved in refinancing. These might include an early repayment penalty if your current loan is on a fixed rate, repaying a loyalty incentive you accepted that’s still binding, lawyer’s fees and a new property valuation.
Renewing your home loan simply means choosing a new interest rate or adjusting the structure of your loan with the same lender.
Refinancing means getting a completely new home loan and immediately using it to repay your existing one. You usually refinance with another lender, but if the changes are substantial, your current lender may also require you to refinance rather than simply renew.
There are costs involved in refinancing, although a new lender may help cover these in order to get your business. If your current home loan is on a fixed interest rate you may have to pay an early repayment penalty, particularly if interest rates have fallen. Other possible costs include repaying a cash incentive that’s still binding, lawyer fees and a new property valuation.
Refinancing a property normally has little or no effect on your credit score. However, frequent credit applications can damage your score. That’s because it looks like you are not managing your money well and have to keep finding new sources of credit. This typically includes multiple applications for things like credit cards, store cards, buy-now-pay-later services, personal loans, car loans, overdrafts and so on.
Most home loan specialists recommend an annual review of your home finance. Sometimes the best deal involves refinancing with another lender, so it’s not unusual to make a home loan application every year or so.
It’s a good idea to check your credit rating from time to time. You can do it online for free if you’re not in a hurry or pay to get an urgent response.
For more, see our article about the credit score you need to buy a house in New Zealand.