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A lot of New Zealand homeowners will be coming to the end of their fixed terms this winter. One of the reasons for this was mortgage holders choosing shorter terms last year. By choosing a shorter term, they may have hoped rates would go down, and they’d be able to re-fix sooner than the average term length of 12-24 months.
But seeing your term come to an end can still be a stressful time, especially if the rate you’re being offered is higher than you expected. The high cost of living is continuing to put pressure on many households.
Being prepared, and knowing what you want to do when your fixed rate ends, could give you peace of mind in your decision-making. So here are a few options and ideas to consider for your mortgage when it comes to rolling over or refixing.
Where do you sit with your home loan and what are your goals?
Your first step is identifying where you are in your home loan journey. Have you just started paying it off, already made a sizeable dent in it, or have you nearly paid it off? Are you expecting to come into some new money soon, such as a bonus or pay-rise, which you could pay towards your mortgage?
What about your goals – are you wanting to go on a holiday, focusing on becoming mortgage-free, or do you have something else in mind?
You’ll need to have an idea of where you stand now and where you want to be either in the next year or by the end of your next fixed term. Knowing this will help you identify what is best for you and your situation.
Lock in certainty for longer or go for lower rates?
Once you know what you’re aiming for, you can start deciding how you want to get there.
Choosing a fixed term provides the certainty of knowing you’ll be paying an exact amount for a period of time. But locking in a long-term rate now could see you miss out if rates drop in the near future.
You could instead opt for a higher rate in the short term, with the hope interest rates will drop by the time you come to refix. While you may pay a little more during this period, you would be able to take advantage of an interest rate drop, if it happens, and save in the long-term.
Opt for flexibility?
The alternative to a fixed-rate home loan is a variable, or ‘floating’ one. The advantage of floating is the flexibility to make lump sum payments without penalty. If interest rates were to go down, you can potentially pay off your loan faster by keeping your repayments at the same level.
You’ll need to look into what your bank or lender offers, but a floating loan could see you pay your loan off faster.
Restructure your home loan
The best-of-both-worlds approach, restructuring your loan and splitting it into different chunks of fixed and floating rates can provide certainty and flexibility.
For instance, you could put the majority of your home loan on a fixed rate, and the small remainder onto a floating one. This would provide the certainty of knowing you have a set amount to pay for most of your home loan, but would also let you make lump sum payments against the floating one.
Additionally, if you have savings, you could even look at offsetting the floating portion of your mortgage, reducing your interest.
While you may pay a little more in the short-term, paying that extra now would mean less interest over the lifespan of your loan, and would likely mean you pay it off sooner. The downside of restructuring is it does make it more complex to manage, as you’ll effectively have two or more loans running simultaneously.
Give your repayments a boost
If you’re in a position to do so, increasing your repayments could be highly beneficial. Paying an additional $50-100 a fortnight (or $100-200 if you’re paying monthly) could cut a significant amount of time and interest off your home loan.
Making such a boost also provides you some wiggle room in the future. If your situation changes, you can drop your repayments back to your original amount.
This repayment ‘boost’ can also apply to interest rates drops. It can be tempting to reduce your repayments and have more in your pocket when rates drop. But if you’re able to, keeping your repayments at the pre-interest-rate-drop amount will see you pay more off your loan in a shorter time.
Prepare ahead of time
Lisa McShane
Lisa McShane is the Head of Home Loan Partners and Specialists at Bank of New Zealand (BNZ). With over 29 years in the banking sector, Lisa has honed her skills in customer engagement, team leadership, and financial advising.
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