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When to Refinance your Mortgage

A Guide for the Savvy Homeowner

Refinancing your home loan can be a smart strategic move that offers a range of benefits, including saving money, accessing equity, and customising your loan to meet your evolving needs. It can even help you reach financial freedom, faster. Getting the right advice is key.

Before making any decisions it’s important to understand the ins and outs of refinancing – from the application process and costs to its potential advantages and disadvantages, as well as the unique considerations for homeowners here in New Zealand.

The aim of this guide is to aid you in making an informed decision about whether refinancing is right for you, right now.

Refinancing explained:

  • What is refinancing?
  • The benefits of expert advice
  • Reasons to refinance
  • Costs of refinancing
  • Things to consider
  • Applying to refinance

First Things First: Refinancing – what does it mean?

Refinancing is when you replace your existing home loan with a new one, usually to a different lender. This can be because of lower interest rates, different loan types, or even consolidating multiple debts into one loan for easier management.

Reasons to Refinance

There are many reasons to consider refinancing your mortgage. These can include:

  • Saving on Interest Cost : Interest rates are an important part of any decision process. 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 your money work better for you to reduce interest costs over the life of your loan.
  • A Change in Personal Circumstances: Getting married, having children, or experiencing a change in employment may prompt a reassessment of your home loan. Refinancing can help accommodate these changes by adjusting your loan terms, consolidating debts, or accessing equity (you have built up) to meet new financial obligations.
  • Consolidating Debt: Refinancing can provide an opportunity to consolidate debt. By combining short-term high-interest rate debt such as credit card balances or personal loans on to your mortgage, you may be able to lower your overall interest cost and simplify your monthly payments.
  • A Change in Financial Circumstances: Whether you experience a windfall, such as an inheritance or a bonus at work, or face unexpected expenses like medical bills or home repairs, your financial circumstances can impact your lending. Refinancing allows you to adjust the terms of your mortgage to better suit your current financial situation.
  • Using your Home Equity: As property value increases, refinancing can be a way to access this equity for a variety of purposes. Common uses are home renovations, debt consolidation, or major expenses like purchasing a vehicle. Tapping into the equity of your home can be an attractive option for homeowners looking to unlock the value of their properties.
  • A Change in Loan Terms: When you initially secured your mortgage, you chose specific loan terms that suited your financial situation at the time. As circumstances change, you may find different loan terms better align with your current needs and goals.
  • A Change in Loan Type: NZHL offers a variety of loan options, including:
    • Managed Home Loans: Similar to a revolving credit, this mortgage is transactional, with all your income ‘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 Loans: 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 Loans: 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.

Refinancing allows you to explore these options and choose a mortgage product that best suits your needs and preferences. A NZHL Mortgage Mentor will help find the loan type that’s the best fit for you.

Costs Of Refinancing

Before deciding to refinance your mortgage, understanding the cost involved is key. Refinancing can potentially save you money in the long run however there are upfront expenses to consider:

  • Legal Fees: You may need to engage a solicitor or conveyancer to handle the legal aspects of the transaction. Legal fees can vary depending on the complexity of the refinancing process and the rates charged by your chosen legal representative.
  • Valuation Fees: Lenders may require a property valuation as part of the refinancing process to assess the current market value of your home. Valuation fees can vary depending on the property.
  • Break Fees: If you’re refinancing from a fixed-rate mortgage before the end of the fixed term, you may incur break fees from your current lender. These fees are designed to compensate the lender for any loss of interest income resulting from early repayment of the loan.
  • Cashback repayment: If you received a cash contribution 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.

Your new lender may give a cash contribution when settling your loan, covering a portion of, or all, of these costs.

Other Things to Think About

In addition to understanding the costs involved, there are several key considerations to keep in mind when refinancing your mortgage in New Zealand:

  • Fixed Vs. Floating Rates: New Zealanders traditionally favour fixed-rate mortgages, offering predictability and stability in repayments. However, this comes with limitations on flexibility when compared to floating rates. Consider your risk tolerance and future financial plans when choosing between fixed and floating options during refinancing.
  • LVR Restrictions and Equity: The Reserve Bank of New Zealand imposes Loan-to-Value Ratio (LVR) restrictions to curb risks in the housing market. These restrictions specify a maximum percentage of the property’s value that can be borrowed based on the home’s value and their deposit. Understanding your current LVR position and how refinancing might affect it is crucial before proceeding.
  • Your Unique Goals: Ultimately, the decision to refinance should align with your broader financial goals. Whether you’re aiming to reduce monthly payments, access funds, or reach financial freedom faster, refinancing should support your financial strategy and enhance your overall financial well-being. Consider using our online mortgage calculators to estimate potential savings and compare different loan options.

Applying for Mortgage Refinancing

The process for refinancing is similar to applying for your original loan. Refinancing your mortgage should start with:

Finding a Trustworthy Adviser: When considering refinancing, you should work with an expert who can help you understand loan types and what best suits your situation. A NZHL Mortgage Mentor – will guide you through the refinancing process and help you achieve your financial goals.

They will step you through:

  • Gathering documentation
  • Finding the best home loan fit for you
  • Organising your finances
  • Property valuation (if required)
  • Loan application and settlement
  • Switching to a new lender.

The Benefits of Professional Advice

Navigating the mortgage home loan refinancing process can be complex and at times overwhelming. Seeking professional advice from a mortgage broker can provide valuable guidance. A broker will work as an intermediary between you and the lender, negotiating on your behalf to secure the best loan.

A NZHL Mortgage Mentor does everything a mortgage broker or adviser does, and much more. Beyond facilitating the mortgage process, NZHL Mortgage Mentors offer financial coaching services, helping clients develop strategies to reduce interest payments, manage debt and reach financial freedom sooner. A NZHL Mortgage Mentor is with you for the duration of your loan, regularly checking in with you to offer support and guidance along the way.

The Bottom Line

Remember, refinancing is not a one-size-fits-all solution. You’ll want to carefully consider your financial situation and future needs, while seeking expert advice to ensure you make an informed decision that aligns with your long-term financial goals.