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In the current economic climate, where home loan rates have been changing frequently, many Kiwis are carefully considering their finance options. Core Logic have estimated between 50-60% of existing home loans (by value) are due to be repriced in the next 12 months or so and are likely to see a rise in their interest rates.
Switching home loan providers, often called refinancing or remortgaging, can be done for many reasons, such as securing a lower interest rate, withdrawing cash, consolidating debt, or to access product features that your current lender doesn’t offer, so it pays to shop around.
Switching is different to re-fixing an existing loan at a new interest rate. Borrowers are effectively repaying their existing mortgage and applying for a completely new loan, with a different bank or finance company.
Factors to consider when thinking about switching
Reasons to switch lenders
There are several reasons why people choose to switch their mortgage provider. Some might prefer an easy way to access and manage their loan details on the go, with a fast low touch service, without waiting in queues or listening to on-hold music. A high proportion of Heartland’s customers have switched their home loan to us because they want to enjoy the savings gained from having a consistently lower interest rate.
Overall costs versus savings
Break fees
Other fees
There can be hidden fees when looking to refinance your mortgage. Knowing these in advance can help ensure refinancing is right option. It’s important to do some research, especially on:
- break fees
- repayment of cash incentives
- exit or discharge fees
- solicitor fees
- valuations
- application fees.
Current earnings, expenses and credit ratings
Consolidating debt
Loan-to-value ratios
The home value may have changed positively or negatively since it was purchased. If the value of the property has gone up, this may allow the borrower to borrow more for purposes such as renovations or paying down other debt. The lender may require a new home valuation which could affect the amount available to borrow. Some lenders won’t provide a home loan if it totals more than 80% of the property value. This metric is called a loan-to-value ratio, or “LVR”. If the amount borrowed was at an 80% LVR originally, and the property has now decreased in value, it is possible that the refinance application will be declined. If the value of the home has decreased, this will also increase the likelihood that the new lender will ask for an updated valuation. Some lenders will provide home loans at LVRs exceeding 80% to certain customers, but they will generally charge a higher interest rate at these levels.
When a mortgage rate is due to be refixed soon, it can be a good time to consider refinancing to benefit from the best deal offered. Approval can be provided a month (or more) in advance of a fixed rate expiring. This provides time to compare the options available, understand the costs and lock in any fixed rates.
Forbes McHardy
Forbes is National Manager – Retail & Home Loans at Heartland Bank. The teams he leads support Heartland’s market-leading products by providing customers with exceptional service.
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