Switching your home loan provider

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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
Substantial savings over the term of the loan can be made by switching to a lower interest rate (or a rate that is lower than what the current lender can offer to refix). These savings could mean the loan can be paid off faster, with less interest to pay overall. But this always needs to be balanced against the costs of switching.
Break fees
It’s important to understand and consider the costs involved in breaking a fixed rate mortgage contract. The existing lender may charge a break fee, also known as an ‘early repayment recovery fee’. Break fees are usually only charged when interest rates are going down, because the borrower is ‘breaking’ the contract which was agreed at a higher interest rate than what the provider could earn by lending that money today, so they require this payment to cover their loss. If a loan is on a floating interest rate, or if a fixed rate loan is about to expire, then breaking a fixed rate early may not incur a break fee. It can be worth breaking early, so long as the interest savings are larger than the break fee charged. The new lender is usually able to finance the break fees into the new loan.
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.
If an incentive has been provided as part of the original mortgage, such as a cash payment, there may be conditions whereby some or all of it may need to be repaid. To help assess if switching is financially beneficial, it’s important to contact the existing lender and request a summary of all fees and costs to settle the loan.
Current earnings, expenses and credit ratings
New lenders will assess a borrower’s ability to repay the loan. They will need to see evidence of income, outgoings, and any other debt such as credit cards and personal loans. They will also look at the borrower’s credit score. When thinking of refinancing in the near future, it can be a good idea to start paying off debt, reducing expenses and putting savings aside each month to help show potential lenders that you will be able to manage your repayments – particularly if you are planning to request a top-up at the same time.
Consolidating debt
When switching, it might be beneficial to take the opportunity to consolidate other debts with the new home loan. Home loan rates are usually lower than other types of debt, such as credit cards or unsecured loans. However, it may take longer to pay these debts off if bundled together, as mortgages are typically set over much longer time periods. For this reason, it is important to use a mortgage calculator to see what needs to be paid over the life of the loan.
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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DISCLAIMER: The information contained in this article is general in nature. While facts have been checked, the article does not constitute a financial advice service. The article is only intended to provide education about the New Zealand mortgages and home loans sector. Nothing in this article constitutes a recommendation that any strategy, loan type or mortgage-related service is suitable for any specific person. We cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you. Before making financial decisions, we highly recommend you seek professional advice from someone who is authorised to provide financial advice.

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