Should I Refinance?
The 8 most important questions to answer
Have you seen Kiwibank promoting refinancing lately? Have you seen banks inviting you to ‘switch’, did you see the ‘shred my mortgage campaign’? These are all tactics trying to get you to switch banks. So much effort goes into attracting new clients with fancy million dollar marketing and not much effort into making clients happier. Are you truly happy with your bank and certain you’re on the lowest rate you deserve?
If you’re thinking about refinancing your mortgage you’re in luck as the rates are super low and your timing is perfect. Refinancing can mean saving money, a lot of money, you wouldn’t do it otherwise. Literally, thousands and thousands of dollars of savings is the aim when refinancing… small savings aren’t worth your time.
According to the Reserve Bank of New Zealand (RBNZ), fixed mortgage rates averaged around 6% in 2012 and they’ve been falling ever since. We’re now seeing rates falling into the low 4% range… it’s time for you to get the rate you deserve. With the recent OCR announcement declaring the current rate isn’t being changed, now is a great time to take advantage of the lowest mortgage rates in New Zealand for over 50 years.
There are some great reasons to consider refinancing. You can:
- Lower your monthly payments.
- Consolidate your debt.
- Pay off your mortgage faster.
They all result in the same thing… you save lots of money, usually thousands and thousands of dollars off the fixed term costs you currently have. Yes, there are break fees which we’ll cover.
Before you refinance please take the time to consider these important factors.
Your time is important so to avoid wasting it we’ve outlined below the quick steps you should take before attempting to refinance. Preparation and research will save you a lot of time and answer the important questions of “should I refinance” and “if not now, when can I review this again?”
The 8 questions that you should ask yourself before refinancing:
We’ll go into detail now but if you’re ready to talk with someone from the team contact us at support@iRefi.co.nz or 0800 REFINANCE (0800 733 462)
P.S. sometimes the calculators are making assumptions and using averages. They round up to prevent us over promising… hopefully, we’ll be able to save you even more
1. Can I refinance my mortgage?
Just because you own a property and currently have a home loan, you don’t automatically qualify for mortgage refinancing, even if your payment record is perfect. Your home’s current value and your own personal financial situation play a big part in whether or not you can effectively refinance.
The current value of your home compared to the amount of your current mortgage is very important. Banks want to lend to people who have good equity in their homes as this provides the bank with security. Calculating your home equity is simple and this is referred to the “Loan to Valuation Ratio” (LVR).
If your home is worth $800,000 and your mortgage is $600,000 then your equity is $200,000. Getting your home re-valued or at least assessing the value of the house in today’s terms (based on your local market sales and values) will help increase the amount of equity you have if your home has increased in value since you got your mortgage. In most cases in New Zealand, this will be true (not everywhere).
To check your own LVR try the following:
Take your mortgage amount and divide it by your home’s value. Take that number and multiply by 100. This figure needs usually needs to be under 80 for us to help.
For example, an LVR equation for a mortgage of $456,000 and a house value of $783,000 would look like this:
$456,000 / $783,000 = 0.582
0.582 x 100 = 58.2 (you are under the 80% LVR and can usually borrow more money)
By checking the listing prices and the recent sales prices of homes in your area, you’ll be able to gauge what your home might be worth. It’s also worth checking on www.QV.co.nz which offers independent market valuations and rating valuations.
Generally, the longer you’ve been paying off your mortgage the more equity you’ll have in your home, this is why people will buy and hold for a few years and then get another investment property (usually getting an “interest only mortgage”).
Do a self-assessment of your own financial situation and compare it to when you bought you home. If you’re in a better position now than when you originally got your mortgage(s) this may help your chances of qualifying for a lower interest rate. A bank just wants to know that you’ll be able to pay them back and good financial stability is key to this.
If you’re in the same or worse position you may still be able to refinance but the lowest rate might not be available. We’ll go into bat for you though. All things being equal, if you’re prepared and have been paying your mortgage(s) on time and without fail you should be happy with the new interest rates you’re offered.
*A very important note on personal loans and debts including credit cards. If you’ve got extra debt you must add this to your mortgage debt when working out your LVR. Consolidating your debts is an important strategy when refinancing to help grow your wealth. If your personal loans and debts bring your LVR over the 80% mark there are special actions and advice we offer.
2. Should I refinance? (sometimes it’s not that obvious)
By now you’ll have a fairly good idea of the value of your home(s) and your financial position. This doesn’t quite mean you’re good to go, just because you qualify doesn’t mean you should do it just yet.The month-to-month savings are important to work out and the actual cost of refinancing needs to be factored in.f these numbers make sense, we can take a closer look at the details.Refinancing from a high rate to a lower rate will ALWAYS mean you can pay less each month or simply make fewer payments (keep your repayments the same and pay the mortgage off faster).
The one major spanner in the works is the break fee. Banks use break fees to protect their loss when you cancel your fixed term and start a new one. First, try our break fee calculator to get an overview.
This takes into account your potential savings and the break fees which are assumed and need to be double checked. We also assume a rate of 4.35% but sometimes get lower rates for our clients. You might incur some legal and valuation costs, but these can be added to your mortgage.
Requesting your break fees from the bank is a simple online process that takes a few minutes and gives you figures to work with.
What are break fees and how are they charged?
A ‘break cost’ is a fee charged by your bank when you pay the loan out (cancel it) before the fixed term has expired. You might do this because you’re being offered a lower rate at a different bank or wanting to get a lower rate at your current bank. Break costs are your penalty for changing your mind… but no big deal because this cost is a tactic to scare you.
Your bank will try and discourage you from changing terms (to a lower rate) or switching banks by charging you a fee. The benefits must be bigger than the costs otherwise, you would not do this. If you’re switching banks the new bank might help you pay these fees with cash back, we can also often negotiate cash back from your current bank as they try to convince you to stay with them.
You can also add the break fees to your mortgage with the lower interest rate and pay this off over the life of your mortgage. In the long run, it’s often a small price to pay for the benefits of re-fixing or refinancing. Some people do get a little worried when the break fees are big fees in the $5,000+ range but when they see that they are saving much more than that they can see it is worth it.
The recommendation tools we’ll show you during the process outline exacting how much you’ll save and whether or not it’s worth it.
Why do banks charge break costs?
When a bank loses money it will try to charge you. By changing your mortgage from a high-interest rate to a lower rate, the bank loses money. Kiwibank has an explanation for this on their website:
“Break costs are complex; they’re different for each person and change day to day. A break cost is charged when we estimate that changes in wholesale rates mean your break has resulted in a loss to Kiwibank.”
In other words; when a bank loses money it will try to pass these costs onto you and scare you into thinking it’s not worth it. This is the same for all banks.
Here’s a numerical example for you:
Your current bank might charge you $2000 to break your old mortgage but your new mortgage will be set at a much lower interest rate (for example going from 5.75% down to 4.15%) and this might save you $5,000+ over the next few years. So the savings minus the break fees equals the benefit to you. Written as the example suggests: $5,000 – $2,000 = $3,000 savings to you.
If you get paid $50/hr that’s a week and a half of work… when it takes an hour to refinance that’s like getting paid $3,000/hr
*If you’re selling soon – You should take into account whether you will be staying in your house until the time it takes until you break even. If you are selling your home soon do not refinance. What we mean is that when you refinance there’s a period of time where you’ve spent some money to save even more money but if the time it takes for you to start getting the benefit is long after you plan on selling your home then it’s not worth it. We’ll make sure you’re aware of this and the break even timing should be clear to you.
3. How do I get the best rate?
The number one reason homeowners refinance their home loans is to lower their interest rates so they can save money. Sometimes people are forced to consolidate their debts and through this process end up refinancing. No surprises here, saving money on your biggest investment makes sense, but some people sit on the fence because they feel an obligation to their bank… as if there’s a relationship.
Remember, your bank could have offered you these lower rates and waived the break fees, but they don’t… for the bank, your mortgage is purely a transaction and you’re probably just a number.
Mortgage advisers all over NZ get offered access to the broker units in each bank and will be offered lower than advertised rates to help people just like you prepare mortgage documents. Mortgage advisers reduce the admin costs for banks and this is why they can get lower rates.
Understand that getting the best rate isn’t completely dependent upon your personal finance and a good financial history. It also depends on what lender you decide to use and how your application is presented to the bank… from a position of power or in a position of weakness. Each major bank has quarterly targets, some of which require their lending team to get more customers in specific regions and under special conditions. For example, a major bank might be over exposed to the Auckland market and its competitor will offer lower rates that won’t be competed on. Shopping around is smart, but it can be time-consuming, this is what we do on your behalf and it’s all part of the free service.
Making your application stand out as a great candidate for new rates or lending is what mortgage advisers do. We make it as easy as possible for your bank or another bank to process. Every day we’re helping dozens of kiwis just like you secure the best rates available. You don’t have to waste your time or guess what rates or cash to ask for. Banks need companies like iRefi and other mortgage advisers to make their lives easier and remove cost from their businesses, this is why we can negotiate better rates because we do it all day every day.
When a bank is talking to your mortgage adviser it knows that competitive rates have to be offered to win the business. If you walk into the bank and ask for their help you’ll be offered only what that bank has to offer… not what the market has but only a limited offer. It’s all about options.
The way iRefi is different from other advisers is we do everything online, your application can be done on the couch on your phone, your computer, by calling or emailing. All in your own time.
4. How much can I save immediately?
Getting a lower interest rate should be your main goal. This is where your savings will start to accumulate and you’ll be able to shorten your mortgage term and make further investments much quicker. The most important number here is how much you’ll save in the short term. By taking your current loans and getting them onto lower interest rates, the savings start to accumulate quickly. The scary part is the break fee. Banks and lenders use a break fee charge to recover their losses and scare you out of refinancing. The good news is a new bank will probably offer you cash back to help cover the break fee and other costs. What we’re trying to see is if there are significant savings that outweigh the costs.
From the example below we can see savings of $7,996.80 off a total loan of $202,000. This is after paying a break fee to the bank.
The exciting part is what to do with these savings, because if you know there’s extra cash available you have 2 options; spend it on personal things that don’t provide future value or we suggest putting this money to work and reaping the rewards.
5. Why is there no such thing as savings if I have a mortgage?
Savings in your bank account earning interest actually makes the bank rich and you poor. If you’re getting a small interest amount for the money in your account (let’s assume 3.5%), you’ll make $35 each year off every $1000 in your account. But this gets taxed and those savings have already been taxed if they came from wages!
What does the bank do with your savings? They lend it back to you at a higher interest rate! The audacity. You give your money to them to lend back to you at their profit… the joke’s on you if you have savings and a mortgage.
If you have savings you should be putting this into your mortgage to make your money work for you. By putting your savings towards your mortgage, you can save even more interest and pay your mortgage even faster. You don’t lose access to your savings if you use a revolving credit function which we’ll talk about soon.
Why Get Cash From My mortgage? You don’t need savings if you have equity in your home and a revolving credit.
One of the reasons people decide to refinance is to get cash from their home to pay for home improvements. These renovations can increase your home’s value and make it more enticing to potential buyers when the owners eventually sell their home… this also increases the valuation and allows you to borrow more against the value of the property.
There are several other types of reasons homeowners refinance to get cash from their home. Life is full of unexpected events and if you ever face a large payment that you didn’t plan for, such as medical costs or unemployment, or if there’s a big ticket purchase on your agenda, like more education or a new car/boat, your home’s equity could help you pay for these expenses. Revolving credit is like insurance money in your account ready to go.
6. How should I structure my loan?
Can you be good with money? Would an extra $10,000 – $100,000 in your bank account as revolving credit come in handy or would it be too tempting? Bear with us as this is where the mortgage terminology gets a little more complicated.
The most common mortgage structure is called a table loan. This is where you see a mortgage rate and term, let’s say 5% over 30 years, and pay your 20% deposit to buy a property. Each month you pay the same amount and it takes the full 30 years to pay off the purchase price of your home and all of the interest. Now if your mortgage was fixed at 5% for 30 years you’d end up paying $524,000 for a $300,000 home (assuming 20% deposit). That’s right your dream home cost you $224,000 in interest!
Now if you pay back just a little bit more each month, or some months, you can save $10,000s off this… small amounts do add up to significant savings.
If you take your savings each month and use revolving credit well, you can pay back small amounts each month more than is required and pay your mortgage back much faster… this means a lot of interest savings. Thousands and thousands of dollars and the difference between retiring early in comfort or having to work well past 65.
7. What is revolving credit? How can I use this to buy more properties?
Now here’s a tactic banks don’t want too many people doing. Let’s assume you have the ability to get $100,000 in extra lending on a mortgage you’ve already got… topping up your mortgage because your house has gone up in value or you just have good equity makes sense for people who want to buy properties.
This money goes into your bank account and only gets charged interest if you spend it. The interest rate you’re charged in the interest rate from your mortgage. Congratulations you now have the banks money to help with the deposit on a new property.
Using a mortgage adviser gives you an unfair advantage over other investors and banks because we can help you set this up across different banks and when you go to buy the new property we’ll show them your bank account (which has all the money) and get you approved with a new bank for a mortgage on the investment property.
You’re not only opening yourself up to lots of options, but you’re protecting yourself in case you ever default on one of the mortgages the bank can’t seize all of your homes… they’re ring-fenced.
This is an exhaustive subject, but I’ll do my best to summarize. If you’re looking to build a portfolio of investment properties, you’ll want to consider using different banks for your properties where possible so you’re not putting all of your eggs in one basket. Any bank will get nervous lending you more than $1,000,000 so if you’re trying to have 4 or 5 houses on mortgages at the same time you might want to have your adviser setup things across 3 to 4 major banks. There are a number of tax advantages that can come into play using trusts and businesses that require your accountant, lawyer and mortgage adviser to be working from the same set of instructions. Your income, where you buy, how often you’re planning on buying, the gearing, and a number of other elements come into play.
The revolving credit allows you to pay back extra amounts each month to reduce the lifetime interest payments and also allows you to accumulate a fund for property investments. Some discipline is required, but you can put your credit cards on your revolving credit and earn all the points for travel etc and not incur high-interest costs if you’re on time with payments.
8. Where do I start?
Try our refinance calculator and book a time to chat with an adviser.
If your goals include buying more properties or renovations and you’d like to borrow money from the bank to get you there… then refinancing your current mortgage to a lower rate is a good strategy. Many property investors have been topping up their mortgages to borrow more and using this money to help buy new properties.
Deciding what type of loan to refinance to is often THE question. With rates continuing to fall, some would speculate that floating your rate for a while then fixing later is worthwhile. We’ll provide the best advice we can and let you make up your own mind. Bear in mind that rates are the lowest we’ve seen in NZ for a very long time and there’s no telling what might happen tomorrow. Global economies far stronger, far bigger, and far more volatile than ours will impact us regardless of what position our economy is in. For most people the safe bet is to fix your rate now, especially for those that are floating, this will allow you to predict your expenses into the future and plan accordingly.
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