Refinancing – also known as remortgaging – allows you to replace your current mortgage with a better one so you can save on interest, borrow more, or pay off your home loan faster. Refinancing involves paying off your existing loan and then taking out a new home loan with a different bank or lender.
The decision to refinance can be a big one, especially when ‘break fees’ and other costs are involved. But with interest rate changes and an array of home loan products available, refinancing might help you better meet your financial goals.
At Moneybox we help Kiwis like you refinance for all sorts of reasons:
– To take advantage of more competitive interest rates;
– Release equity for home improvements;
– Consolidate debts to make repayments more manageable;
– Adjust mortgage terms, monthly payments or loan types to better align with financial goals; or
– Take advantage of another bank’s products and services.
Whatever your motivations are for refinancing, we can help. In this easy-to-follow guide, we walk you through the basics of mortgage refinancing, helping you decide if it’s the right move for you now or in the future.
1. Evaluate your current situation
Firstly, think about why you want to refinance and explore what other options are available. Depending on your goals, restructuring or refixing might make more sense for your situation. Refinancing is ideal towards the end of your current fixed-rate term or during significant financial changes, like increased income or when seeking funds for a new home or investment property.
Next, examine your finances – your expenses, savings, credit score, and debt-to-income ratio – to assess your eligibility for a good refinancing deal. Also, factor in how long you plan to stay in your home, as this impacts whether refinancing savings outweigh the costs. If you intend to move soon, it may not be worthwhile due to insufficient time to cover refinancing expenses.
2. Compare mortgage interest rates and terms
Even a small difference in mortgage rates can save you money in the long run. Sites like interest.co.nz show interest rates from different NZ lenders. But what you see advertised isn’t always the best rate available. Talking to an independent financial adviser who specialises in mortgages will allow you to get impartial advice from someone who works for you (not the banks). At Moneybox, we negotiate the absolute best mortgage rates and terms on your behalf, giving you access to better deals than those publicly advertised.
Online calculators like the Moneybox mortgage calculator can help you figure out what you’d save by switching to a lower interest rate. You can also see how much quicker you could pay off your loan if you keep the same repayments or increase them while at the lower rate. You could trim years off your mortgage!
Let’s consider a $300,000 loan at 5% interest that takes 25 years to pay off with a monthly repayment of $1,770. Switching to a rate of 4.8%, while keeping the same repayments, would reduce the term to 23 years and save approximately $28,500 in interest over the life of the loan.
But do keep in mind that interest rates are constantly changing, making it challenging to predict what lies ahead and whether the decision to refinance is worth it.
Home loan hack:
Accelerate paying off your mortgage and save on interest by switching to fortnightly repayments instead of monthly. With 26 fortnights in a year, compared to 12 monthly payments, you effectively make an extra month’s worth of repayments annually. This hack reduces the overall cost of your loan and helps you become mortgage-free sooner!
3. Avoid resetting the clock
If you’ve been paying your mortgage for a while, refinancing into a new 30-year loan might not be the best idea. It could end up costing you more in the long run. Instead, pick a loan term that matches how much time you have left on your current mortgage to avoid resetting the clock.
4. Factor in fees and incentives
Comparing costs against the benefits of a new mortgage is important, because it will help you decide if taking another deal is actually worth it. For instance, if you’re on a fixed rate mortgage and considering refinancing, you need to find out from your bank or lender if you’ll be charged a ‘break fee’ for exiting the contract. You may also be asked by your existing lender to repay any cash incentives you received when you took out the loan (also known as cash clawbacks). You’ll need to engage the services of a lawyer to get the mortgage changed, and additional assessments like property valuations might be required when you switch to another lender, which come at a cost.
Conversely, many banks offer cash contributions as an incentive to take a mortgage with them. Those cash contributions might help cover the costs of switching and put cash in your hand.
5. Talk to a mortgage broker
When exploring other lenders, it’s helpful to talk to an independent, like the team at Moneybox. We can share a range of options with you, compared to a bank which only offers their products. We’ll shop around on your behalf and help you find the right loan for your needs. When you decide to refinance, you’ll need to go through a mortgage application process and provide essential information about your income, assets, and employment to prove your ability to manage the new loan.
Refinancing your mortgage can be a smart move to achieve your financial goals. Whether you want to save on interest, borrow more, pay off your loan faster, or consolidate debts, exploring the possibility of refinancing is worthwhile. To make an informed decision, evaluate your current financial situation and consider your long-term plans. Compare mortgage interest rates and terms to find the best deal, while factoring in associated fees. Before deciding, consult a trusted financial advisor or mortgage broker.
At Moneybox, we’re with you all the way. Let’s discover whether refinancing is the right move for you. Get in touch today!