An Expert Guide to Streamlining Your Home Loan in New Zealand

There are many reasons to consider refinancing your home loan. Refinancing can be a great strategy to reduce interest costs, make better use of equity, or simply ensure your loan is best suited to your needs. In some cases, refinancing can even help you reach financial freedom, faster.

The opportunity to take advantage of a lower interest rate or increase your access to cash is naturally appealing. But before you jump into refinancing, it’s important to understand the ins and outs – what the process will look like, the benefits vs. the drawbacks, and any obligations you have with your current loan.

This comprehensive guide to refinancing will help you make an informed decision and give you tips on navigating the process should you decide to go ahead.

We will cover:

• What is refinancing and why would you consider it?
• The refinancing process
• Kiwi considerations
• Is refinancing right for you?
• Making the most of refinancing
• What you need to know
• Next steps if you’ve decided to refinance.

What is refinancing and why would you consider it?

Refinancing involves replacing your existing home loan with a new one, typically from a different lender that may be offering more favourable terms. This can translate to lower interest rates, different loan products, or even consolidating multiple debts into one loan for easier management. or potentially interest cost savings.

Reasons why refinancing may be beneficial include:

Making the most of your loan: While a lower interest rate can reduce your interest costs in the short term, at NZHL, we believe the structure of your home loan will make a bigger impact in the long term. Your home loan should support your financial goals and make the best use of your money to reduce interest costs over the life of your loan.

Using your home equity: Refinancing may allow you to borrow against the equity in your property which can be useful for funding renovations, debt consolidation, or investing in another property. However, this may have financial impacts and should be discussed with a Mortgage Mentor.

 Switching loan types: Refinancing gives the opportunity to assess if there is a loan product better suited to your current financial situation. Below are a few examples of loan products arranged by NZHL. A qualified Mortgage Mentor can walk you through the various loan types and implications of each:

• Fixed-rate Loan: Offering stability, a fixed-rate loan locks in your interest rate for a set period, regardless of market fluctuations. Ideal for Kiwis seeking budget predictability.  While the interest rate is usually lower than a variable rate the downside is there no flexibility and may have associated costs for lump payments or if you wish to break the term.
• Variable-rate Loan: The interest rate on the loan can vary over time based on the market interest rates. Although it usually offers a higher interest rate, it also provides borrowers with flexibility by allowing them to make extra repayments without incurring penalties. However, it carries the risk of future increases. Best for risk-tolerant borrowers.
• Managed Home Loan: Is an all-in-one account combining features of an everyday bank account, a reducing overdraft facility and a loan facility. The transactional portion enables your income to be channelled into one account to maximise interest savings. A managed home loan includes access to our debt management software, DebtNav and regular reviews with your NZHL Mortgage Mentor.
• Standard Table Loan: This is the most common type of home loan with a term up to 30 years. Regular repayments consist of both principal and interest. Most of your early repayments pay off interest rather than principal, while most of your later payments pay off more of the principal.
• Interest Only Loan: With an interest-only home loan, the borrower is only required to pay against the interest on the loan for a specific period, (typically a term of 6 months – 5 years) during which the principal balance doesn’t reduce. After the interest-only period ends, full repayment is due, otherwise these loans typically convert to a standard table loan.

Consolidating debt: If you’re juggling multiple debts, such as personal loans or credit card balances, refinancing can help consolidate them into one manageable mortgage payment. This can streamline your finances and potentially lower your overall interest costs.

Hypothetically, consider this scenario: Amit was juggling multiple high-interest debts like credit cards and a personal loan, and he was finding it a real challenge to make his payments each month. By refinancing his mortgage, Amit was able to consolidate his debts, streamlining his payments. This move simplified his finances and significantly reduced the amount of interest he would pay over time.*

Renovations: Refinancing can be a strategic option for funding home renovations. By tapping into your home equity, you can finance improvements or repairs, potentially increasing your property’s value. Careful consideration of the renovation’s cost and the potential return on investment is crucial to ensure it’s a financially sound decision.

Hypothetically, consider this scenario: Sarah and Hemi were hoping to renovate their kitchen. They had significant equity built up in their property and decided to tap into it through refinancing. They chose a transactional loan with revolving credit; they were able to fund the renovations (with a slight increase in their monthly repayment). By strategically accessing their equity, Sarah and Hemi were able to improve their living space and add value to their property. *

The Refinancing Process

Although refinanced loans can vary significantly in size, term and type, the process of finding and securing one remains pretty much the same across the board.

Refinancing your mortgage typically involves the following steps:

1. Finding a competent and trustworthy adviser: Work with a financial adviser or mortgage broker who can help you understand loan types and what best suits your situation. Better yet, engage a Mortgage Mentor – they will guide you through the refinancing process with an eye on your long-term goals and reaching financial freedom.
2. Comparing home loans for the best fit: Don’t necessarily settle for the first offer you receive. Compare multiple factors such as interest rates, fees, and loan terms. Remember, the cheapest rate isn’t always the best option. Consider the overall package.
3. Getting your finances in order: Before applying, ensure your credit score is in good shape and gather all necessary documentation, such as income proof, tax returns, current mortgage information, property valuation, and any other relevant financial details.
4. Obtaining a current valuation: Lenders may need a current valuation of your property to determine the loan amount and terms. This is especially relevant if you’ve owned the property for several years.
5. Applying for your new loan: Once you’ve chosen a lender and negotiated the terms, submit your formal application. Be prepared to provide additional documentation and pay any upfront fees.
6. Settling the old loan and switching to the new one: Once your new loan is approved, the lender will handle settling your existing mortgage and transferring the funds. This typically involves legal paperwork and property title changes.

Kiwi Considerations

New Zealand’s housing market can present unique challenges and opportunities for refinancing. Factors like fluctuating interest rates, regulatory changes, and regional housing market trends play a significant role.

As a homeowner, it’s good to stay informed about these dynamics to make the best refinancing decision. While the general principles of refinancing anywhere will apply in New Zealand, there are some unique factors Kiwi homeowners should be aware of:

• Lending restrictions: New has implemented responsible lending practices to curb risky borrowing. These measures, such as debt-to-income ratios and credit score requirements, can impact your eligibility for refinancing.
• Early repayment penalties: Some New Zealand mortgages have early repayment penalties, which charge you a fee if you pay off your loan before the fixed-rate term ends. Factor these penalties into your calculations when considering refinancing.
• Cashback repayment: If you received a cash payment from your lender when settling your loan, you may be obligated to pay this back if you have not kept your loan for the agreed period. Ensure you know your obligations and factor this into your calculations when looking to refinance.
• Valuation costs: Refinancing may require a new property valuation, which can come with associated costs.

Is Refinancing Right for You?

Refinancing can be a powerful tool for savvy Kiwi homeowners however, it’s not a one-size-fits-all solution. It’s a time to think about your current financial situation and long-term objectives. Consider your future plans and goals.

Are you seeking lower monthly payments? Do you want to adjust the loan term to align with your financial future? Maybe you’re aiming to use your home’s equity for significant purchases or investments?

Understanding your goals will determine the structure of your home loan and whether refinancing is beneficial for you.

Refinancing can change the length of your mortgage. Shortening your loan term can save on total interest costs but may increase monthly payments. Extending the loan term can lower monthly payments but result in higher overall interest costs.

You should carefully consider your financial situation, weigh the potential benefits against the costs, and seek professional advice from a financial adviser before making a decision.

Refinancing has associated costs – homeowners are responsible for fees, including application fees, legal fees, valuation fees, and potential break fees if they are exiting their current mortgage early.

It’s important to calculate costs and balance them against the advantages of a new mortgage. You want to ensure refinancing will benefit you in the long term.

Make The Most of Refinancing

In the first half of this guide, we defined refinancing, what to expect and how it could fit into your financial plan. Now, let’s take a deeper dive into the nitty-gritty details.

What You Need to Know:

Before you enter into any loan, understanding the financial implications is crucial. In order to do that, you need to understand how to not only read but interpret the terms of your loan agreement. We strongly recommend going through your documents with a professional before signing, but to get you started we’ve compiled a list of the basic terms, phrases, and concepts you’re likely to encounter:

• Cost vs. savings: You’ll need to break down the numbers. Calculate the difference between your current and potential interest rates, factoring in any early repayment penalties and refinancing fees. Project how much you’ll save over the loan term. If the savings outweigh the costs, you’re on the right track.
• Break-even point: Determine the “break-even point” – the time it takes for the savings from refinancing to offset the upfront costs. Aim for a break-even point within a timeframe that aligns with your financial goals.
• Break Fees: Not to be confused with break-even point, break fees are what may apply when refinancing out of a fixed-term mortgage early. These fees can vary, often based on the remaining loan term and interest rate differentials. Understanding these fees is vital to ensure refinancing is cost-effective.
• Equity access: If you’re planning to tap into your home equity, factor in the additional interest accrued on the borrowed amount. Ensure the benefits of accessing equity outweigh the increased cost of borrowing.
• Term time: Refinancing might extend your loan term, potentially increasing your overall interest paid. Analyse the trade-off between lower monthly repayments and the total interest cost over the extended term.
• Loan types: As with your initial mortgage, there are several loan types available. You should discuss with your mortgage broker or Mortgage Mentor which type best suits your situation and future goals.

So, You’ve Decided to Refinance – These Are Your Next Steps

Once you’ve made the choice to refinance, it’s time to pursue your new loan. We recommend that you:

• Seek expert guidance: A mortgage broker or Mortgage Mentor can provide personalised guidance, ensuring you understand your options and make informed decisions based on your unique financial situation. A Mortgage Mentor will help you create a long-term plan that includes budgeting benchmarks and payment consolidation to reach your goals faster.
• Compare & contrast: Don’t get swept off your feet by the first offer. Compare your options. Remember, a lower rate isn’t everything; consider customer service, flexibility, and fees. And beware of add-ons – some lenders might offer tempting extras but be sure they serve your needs and don’t inflate the overall cost.
• Get your documentation in order: Gather your financial information – payslips, tax returns, bank statements, property valuation. The more prepared you are, the smoother the process.
• Stay informed, stay involved: Communication is key! Ask questions, understand the terms, and stay informed throughout the process. Don’t be afraid to raise concerns if something feels wrong or confusing.

The Bottom Line

Refinancing, done right, can be a transformative step for Kiwi homeowners. With careful planning, informed choices, and a dash of financial savvy, you can unlock a mortgage that meets your needs and helps you build a future you want to live in.

Your home loan is not something you have to do alone – an NZHL Mortgage Mentor will work with you at every step of your home loan journey to help you achieve your goals and reach financial freedom faster.

*Scenarios are intended as an example only; these are not based on real life situations.