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Why, when, and how to refinance your mortgage

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 inherited a small fortune or needed to move cities? 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.

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 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?

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 a mortgage broker could save you thousands of dollars. There are online mortgage calculators that you can use to compare your current mortgage (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 impact how much you can afford to repay. 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. Here are some examples of when your new circumstances might motivate you to find a new lender or talk turkey with your existing 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 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.
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 loan term in half. They’re going to talk to their existing lender, as well as a couple of other 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 existing lender or having a chat with your current lender. 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 consider refinancing or restructuring to a joint mortgage. It’s a time to shop around for a new lender and challenge your existing lender 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 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 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 will be involved for your situation, talk to your current 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 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 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 mortgage broker works closely with multiple lenders, so knows what mortgage deals are available and which would be suitable for your situation.

A mortgage broker 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 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 mortgage 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, just email us for a list of mortgage brokers near you.

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 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. If you’re planning to switch lenders just to get a better rate, there’s a chance your current 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 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.

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