A Guide for the Kiwi Homeowner
We will cover:
- What is refinancing?
- How does refinancing work?
- Kiwi considerations
- Is refinancing right for you?
- Making the most of refinancing
When you purchased your home, you likely took out a mortgage. That mortgage reflects the circumstances when it was created – from the market conditions to interest rates to your financial situation and goals.
Down the line, you may be in an altogether different situation, with income, family circumstances, or long-term goals no longer suited to your current loan. When you find yourself in a mortgage that’s no longer the best fit, that’s where refinancing comes in.
What is Refinancing?
Refinancing involves replacing your existing home loan with a new one. This can mean new terms, different loan structures, or even consolidating multiple debts into one loan for easier management. There are many potential benefits and reasons to refinance, such as:
Saving on interest costs:
While a lower interest rate can reduce your interest costs in the short term, at NZHL, the structure of your home loan will make a more significant 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.
Access to your home equity:
Refinancing allows you to borrow against the built-up equity in your property. This can be useful for funding renovations, debt consolidation, or investing in another property.
Changing loan types:
Refinancing can allow you to switch to a loan product that better aligns with your current financial situation. For example, you might opt for a fixed-rate loan for stability or a variable-rate loan if you anticipate future interest rate drops. (An NZHL Mortgage Mentor can walk you through the various loan types and their implications.)
Consolidating debt:
Refinancing can help consolidate multiple debts into one more manageable payment if you’re juggling them. This can streamline your finances and lower your overall interest costs.
Renovations:
By tapping into your home equity, you can finance improvements or repairs, potentially increasing your property’s value.
A change in financial circumstances
Your financial situation may evolve. Whether you experience a windfall or face unexpected expenses, your circumstances can impact your mortgage needs. Refinancing allows you to adjust the terms of your mortgage to better suit your current financial situation.
A change in personal circumstances
Getting married, having children, or experiencing a change in employment status may prompt a reassessment of your mortgage. Refinancing can help accommodate these changes by adjusting your loan terms, consolidating debts, or accessing equity to meet new financial obligations.
How Does Refinancing Work?
Refinanced loans can vary significantly in size, term and type. However, finding and securing one remains the same across the board. Refinancing your mortgage typically involves the following steps:
- Finding a trustworthy adviser: When considering refinancing, it’s best to work with a financial adviser or mortgage broker who can help you understand loan types and what best suits your situation. Better yet, get in touch with a NZHL Mortgage Mentor – they will guide you through the refinancing process with an eye on your long-term goals and financial freedom.
- Comparing home loans for the best fit: Don’t necessarily settle for the first offer you receive. Look at factors such as interest rates, fees, and loan terms. Remember, the cheapest rate isn’t always the best option. Consider the overall package.
- Getting your finances in order: Before applying for a new loan, ensure your credit score is in good shape. Gather all necessary documentation, such as proof of income, tax returns, current mortgage information, property valuation, and other relevant financial details.
- Checking if you need a current valuation: Lenders often require 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.
- Applying for your new loan: You’ll submit your formal application once you’ve chosen a loan type and negotiated the terms. Be prepared to provide additional documentation and pay any upfront fees.
- Switching to your new loan: Once your new loan is approved, the lender will settle your existing mortgage and transfer the funds. This typically involves legal paperwork and property title changes.
Refinancing Considerations for the Kiwi Homeowner
The Reserve Bank of New Zealand (RBNZ) Cash Rate:
The RBNZ cash rate is the benchmark interest rate in New Zealand, affecting the interest rates offered by lenders. When the cash rate is low, it can be an excellent time to refinance to secure a lower rate.
Loan-To-Value Ratio (LVR):
Your LVR is the amount you borrowed compared to the value of your home. Lenders in New Zealand typically require a lower LVR for refinances than for new purchases. This means you may need to have built up more equity in your home before you can refinance.
Fees:
Refinancing can incur various fees, such as application fees, valuation fees, early repayment fees, and registration fees. It’s important to factor in any fees when considering refinancing your mortgage.
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.
Making the Most of Refinancing
While refinancing can offer significant benefits for homeowners, it’s essential to approach the process strategically to maximise its potential advantages. You should:
Consider the long-term impact:
Carefully consider the long-term implications of your decision. While lowering monthly payments or accessing home equity may provide relief, be mindful of how refinancing will affect your overall financial goals and timeline for homeownership.
Factor in closing costs:
Refinancing typically involves closing costs, including appraisal fees, origination fees, title insurance, and other charges. Be sure to factor these costs into your calculations when evaluating the savings or benefits of refinancing.
Consult a mortgage adviser:
If you need clarification on whether refinancing is right for you, consider consulting with a mortgage broker or NZHL Mortgage Mentor. An experienced adviser will help you assess your options, weigh the pros and cons, and make informed decisions based on your circumstances and goals.
Is Refinancing Right for You?
Refinancing can be a great way to save money or make your home loan more manageable. In some cases, refinancing can even help you achieve financial freedom faster. Before you decide to refinance, it’s important to consider your circumstances. Here are some questions to ask yourself:
- How much equity do I have in my home?
- What is my current interest rate?
- What are my financial goals?
- Can I afford the closing costs of refinancing?
As we said earlier, it’s a good idea to talk to a qualified mortgage broker or Mortgage Mentor. They can walk you through your options, and if you decide to refinance, they’ll help you find the best loan for your needs.
The Bottom Line
When done right, refinancing can be a powerful tool for homeowners. With informed choices, careful planning, and the support of a Mortgage Mentor, it’s possible to secure a new mortgage that meets your needs and moves you toward your future goals.