Should I refinance my mortgage to get a lower interest rate?

Refinancing is a hot topic at the moment.

While interest rates are high, everyone’s out hunting for the best deal possible.

Maybe you’ve seen another bank with a cheaper interest rate, or maybe you’d like to extend your loan term to make mortgage repayments less painful.

Here at Opes Partners we work with Kiwis around the country.

Our sister company, Opes Mortgages, helps homeowners refinance mortgages all the time, so we know the questions people tend to ask and the things that surprise them.

That’s why in this article you’ll learn what refinancing is, and why it can be the right option for some people.

If you have any questions or thoughts, please leave them in the comments section below.

What is refinancing?

Refinancing is when you take out a new mortgage (with a new bank), to pay off your old one.

People often get this confused with “re-fixing” and “restructuring”. Let’s clear that up.

Here are the “3 R’s” when it comes to mortgages:

1) Re-fixing – that’s when you sign up for a new interest rate. Same loan and the same years to pay it off ... it’s just a new interest rate with the same bank.

2) Restructuring – this is when you stay with the same bank but change the set-up of the loan.

So, you might split the mortgage into different chunks, or you might set up some of your mortgage on interest-only or an offset.

You might also shorten (or lengthen) the loan term, so you pay off the mortgage over 15 years rather than 30, for example.

But this is all with the same bank. You don’t change.

3) Refinancing – that’s when you take out a mortgage with a new bank. You use that new mortgage to pay off your old one, so you change banks.

Now, often when you refinance you will also restructure your mortgage, but I’ll get to that in a bit.

So why do people refinance? You might do it to:

• Take out a larger mortgage
• Get a lower interest rate
• Get ready to invest in property
• Or do it with someone to pay off your mortgage faster.

So what are the pros and cons of refinancing your mortgage?

More from Opes:

• The split banking strategy - Use this to improve your equity (Article)
• Offset mortgages - What is it? (Article)
• Revolving credit - What is it and should I use it? (Article)

What are the pros of refinancing?

Here’s an honest analysis of the pros of refinancing your mortgage.

#1 – You might get a better interest rate

At the time of writing, the cheapest 1-year rate is Kiwibank’s 6.99%.

The most expensive is ASB’s 7.45%.

Let’s put that in context. Let’s say you have a $500k mortgage. How much would you save if you refinanced from ASB to Kiwibank? That small difference in interest rate could save you $44 a week.

That's $2.3k a year. Or, to put it another way, you get to keep an extra 2.2 weeks of your pay packet (assuming you’re on the average Kiwi wage of $70k).

At first glance, $44 a week might not sound all that much.

But having to work a full 2 weeks to pay the extra interest does.

There are drawbacks, too. Yes, Kiwibank is the cheapest, so everyone is trying to get a mortgage with them.

They’ve got a lot of applications, so it’s taking longer for them to get through them all. So, at the time of writing they are taking time to process mortgage applications.

#2 – You might get a cashback

Banks will often give you a cash incentive to get a mortgage from them.

For example, BNZ might give you a $3k cashback to move your mortgage to them.

When you take out the mortgage you might find $3,000 sitting there in your bank account.

Sounds good, right?

But, and this is a big but, you will need to check your T’s and C’s with your current bank. For instance, if your current bank gave you a cashback too.

All banks have fine print that says you have to stick with them for a few years. If you move too quickly you will have to pay some (or all) of that original money back.

As you’ll soon see, there are costs to refinancing too. You might have to pay $1,000 to your lawyer. A $3k cashback is attractive, but just remember some of that will go to legal costs.

#3 – A new bank might give you the lending or loan structure you want

Let’s say you and your partner were aggressively paying down your loan when rates were 2%. You could afford to make payments above the bank’s minimum.

But now, you're up for a re-fix at 7%. Your minimum repayments are higher and you both decide that’s too painful for your budget.

You might want to extend your loan terms. So, push the loan back out to 30 years to bring those repayments back down.

That will mean you pay more interest over time, but repayments will be more manageable.

You ask your bank if you can do this. Your bank might say “no”, so you take it to another one. That new bank might say “yes”.

Let’s take another scenario. You might have an investment property on interest-only. Your bank said they’d give it to you for 5 years and that 5 years is almost up.

You ask them to go on interest-only for another 5 years, but they say “no”. A new bank might say “yes”, so you refinance to get the loan structure you want.

#4 – You can start split-banking

One big benefit to refinancing is to use split-banking. This is where you spread the lending of multiple properties over different banks.

This will ensure you protect yourself and the sale proceeds in the future. So if you sell an investment property the bank can’t force you to pay down debt.

But remember, if you use two banks you have to meet both their lending criterias. Instead of jumping through the hoops of one bank, you're now jumping through 2.

What are the cons of refinancing?

But refinancing also has downsides. Here’s an honest review of the cons of moving your mortgage to a new bank.

#1 – It takes time

Applying for a mortgage takes a lot of time.

If you refinance, you have to go through the entire rigmarole again. That means a new mortgage application. You might need to get a new registered valuation too.

Of course, don’t let that put you off. The effort you make can be worth it if you save money, but it does take time to get it up and running.

#2 – You might not be able to refinance if the value of your property has dropped

On top of the fees (more on this below), you might have to pay for a valuation.

Let’s say you want to move your loan from BNZ to ASB.

You might have got a big mortgage while property prices were going up. At the time of writing prices have gone down.

So, if the value of your property is looking a bit tight you might have to pay around $750 to get a valuation. And that’s before you know if you can get the mortgage.

Then, if it turns out the value of your property has gone down, you might not be able to move to a new bank, so you’ve paid for a valuation but can’t do anything with it.

It’s less of a worry if your mortgage is small.

That’s why it’s best to speak to your mortgage broker first. That way (hopefully) you don’t spend money and then get nothing for it.

#3 – You might not get a lower interest rate

Sometimes refinancing might be the wrong option for you.

Let’s say you have a property that you bought with a 20% deposit at the peak of the market.

It’s dropped in value by 10%, so now your loan makes up 90% of your property’s value.

If you move to another bank, you'll need to get a high LVR loan.

Because you’ve got less than 20% deposit (equity) you now need to pay the standard rate, and maybe a high equity margin too.

That’s because low deposit borrowers don’t get access to the “special” interest rates advertised on billboards and TV.

Whereas, if you stayed put at your bank, you’ll likely still get access to the special rates. The bank won’t usually look at your property’s value.

How much does it cost to refinance my mortgage?

Refinancing your mortgage isn’t free. There are costs. Here’s a breakdown of the main costs you can expect to face.

#1 Break fees

If you go to another bank, but you are still on a fixed term, you might have to pay a break fee. That usually happens when interest rates have dropped.

This might not be so much of a worry at the moment, but as interest rates start to fall again, that is something to be aware of.

#2 Discharge fee

Often the bank will charge you a discharge fee when you move banks. This is usually $150 to $200 to move your mortgage.

#3 Legal fees

Yes, there are legal fees when you move your mortgage.

Your lawyer needs to de-register the old mortgage from your old bank. Then they need to re-register the mortgage from the new bank. This usually costs about $1000 - $1500.

That said, there are cheaper options available.

Sanderson Weir has a “Switchme” service that can do the whole process for a smaller cost, but they won’t provide more than the bare minimum legal advice.

Should I refinance my mortgage?

Everyone wants to get the lowest rate possible (for good reason). But, refinancing isn’t always possible, and it’s not the right fit for everyone.

Here are some common situations where refinancing could be a good option:

Refinancing your house. Let’s say you’ve owned your house for a few years. It’s increased in value and you’ve got some equity. If you want to tap into that equity to do some renovations, your bank might not be willing to do that, but another one might be. You might switch banks to get the extra lending.

Interest-only renewals. We see this one a lot here at Opes Partners. Your bank might have given you 5 years of interest-only, but now you’re up for renewal they might say “no”, whereas a new bank will give you another 5 years because you’re a new customer.

Maybe you’ve met a new partner and they want to buy into your house. Sure, this is a bit more complex, but let’s say you want to take out a new mortgage with your new partner and add them to the title. Going fresh with a new bank could be a good option.

In all situations it’s always a good idea to chat with your mortgage broker about your options.

Looking for a good mortgage broker? Check out our sister company – Opes Mortgages.