Refinance home loans
Refinancing your home loan can save you thousands each year over the life of your mortgage. And switching is easier than you think.
What is refinancing?
Refinancing simply means switching from one home loan to another. You can switch loans with your current lender or get a new product with a new lender.
The main purpose of refinancing is usually to get a lower interest rate to save on repayments. But you can also switch to a mortgage with more features, or move from a property investment loan to an owner-occupier loan. Some borrowers refinance to unlock equity in their property.
Why should I refinance?
Switching can save you money, but there are far more benefits than simple savings. You should look at switching mortgages to:
- Get a lower interest rate. The lower your rate, the lower your repayments. And rates in New Zealand are very competitive right now. If you haven’t looked at your home loan in a few years you might be surprised to learn how much you’re paying. Compare rates and see just how much you could be saving.
- Unlock more features. Features like additional repayments, a redraw facility, portability and offset accounts can help you save on interest repayments. They give you more flexibility and let you get more out of your mortgage.
- Unlock equity. The amount of a property you own is called equity. And you can access it through a line of credit home loan in order to purchase another property, renovate your home or buy a car. Refinancing in this way can save you money on other purchases (a mortgage typically has a lower rate than a car loan, for example) but adding to your home loan means you’re paying it off longer.
- Consolidate your debts. Juggling a few debts can be hard. Debt consolidation lets you roll your existing debts into a single manageable loan. If done correctly, you can save on fees and reduce the amount of interest payable by combining your debt into a single repayment with a competitive rate. It’s important to work closely with your lender during this period to ensure that you actually save money in the process.
Examples: the benefits of switching to a better loan
Bryan switches to a lower rate
Bryan is four years into a 30-year mortgage. It’s an owner-occupier, principal and interest loan that started out with a low 3-year fixed rate. But the fixed rate period has finished and the current rate is much higher, at 4.34%. Bryan initially borrowed $700,000 and has repaid $120,000 so far.
- Current monthly repayment: $3,104 per month.
Bryan jumps onto Finder NZ and starts comparing loans. He doesn’t care about premium features like offset accounts, but wants a loan that is flexible and offers a low rate. Bryan finds a good, basic mortgage product with a variable rate of 3.62%. The loan does come with a $500 application fee. His old loan has a $200 discharge fee.
- Switching costs: $700.
- New monthly repayment: $2,871 per month.
Even with the cost of switching factored in, Bryan is still coming out ahead. By changing home loans he’ll save $233 a month in repayments. That’s $2,796 a year.
Leah wants more features
After making six years of repayments on a $800,000 mortgage Leah decides she wants more out of her loan. She has a package loan with her bank and has bundled together her mortgage with a credit card and a savings account. But the rate is high (4.12%) and the package doesn’t suit her needs anymore. She hardly uses the credit card.
Leah compares her options and finds a variable loan with a 3.75% interest rate and a 100% offset account. She wants to take some of her savings and offset them against her loan to lower her interest and pay off the loan faster.
- Savings: Leah’s new rate is saving her over $100 a month.
- Offset benefits: By putting $30,000 of savings into her offset account Leah can shave a year off her home loan.
Arabella taps into her home equity
Arabella wants to invest in property. She has almost paid off her home and has $750,000 in equity. Because she doesn’t have much debt to repay on her loan she can easily switch to a line of credit loan. She can then access cash to use as a deposit on a small investment property. This can be a risky investment strategy if she borrows too much money.
But because Arabella doesn’t have much debt and her income is steady, her risks are much lower. She’s also planning to use her investment property as a source of income, further minimising her risks.
- Benefits: Arabella can purchase an investment property faster and generate rental income.
How do I go about switching home loans?
The whole switching process can be a little complicated but think about the savings! Investing a few hours of your time could save you tens of thousands of dollars over the life of your loan.
Here’s the step-by-step refinancing process:
- Examine your current loan. Check your rate, repayment costs and fees. If your rate’s above 4% you should look at switching.
- Speak to your current lender and ask for a lower rate. Sometimes your lender will offer you a discount on your rate. That could be all you need to do, but you could still find better elsewhere.
- Get a quote for your exit costs. If you decide to switch lenders you might have to pay a fee, but it could be worth it if the savings are big enough.
- Compare home loan options. Look for a loan with a better rate and features you need. It’s that simple.
- Crunch the numbers. Examine the costs of your new loan, including application and ongoing fees and make sure the new loan really is a better deal.
- Apply for the new home loan. Wait for approval from the new lender.
- Exit your current loan. Notify your current lender and discharge your mortgage. Your new and current lender will take care of the rest.
- You’ve refinanced. Be sure to monitor your new loan’s repayments and change loans again in a few years if you find a better option.
What documents do I need when switching lenders?
Refinancing requires a new home loan application. This means you’ll need to submit pay slips, payment summaries, identification documents and other paperwork. And as a refinancer you’ll need to provide some information about your current home loan.
How much will switching cost me?
Changing mortgages can come with upfront costs for starting a new loan and exiting your old loan. Fees are usually the biggest expense. You should always factor these costs into your decision, but don’t let a single upfront cost deter you from making a major saving in the long-term.
Fees related to switching loans include:
- Early terminations fees (for your old loan)
- Discharge fees (for your old loan)
- Application fees (for your new loan)
- Ongoing fees (for your new loan)
Are there situations when I shouldn’t switch?
For most borrowers refinancing is a good idea. But it’s possible that switching loans just isn’t worth it. Here are a few cases where you’re probably better off sticking with your current loan:
- You have a fixed rate home loan with a very high exit cost and the cost of fees could outweigh the benefits of changing until the fixed rate period is over.
- You think you’ll probably sell your property in the near future and you won’t keep the loan long enough to make any decent savings.
- Your loan amount is small. In this case the savings you’ll get by switching might not be worth the interest you’ll pay.
- You’ve been with a lender for quite some time, enjoy the service you receive and have other products with them (you might be better off asking your lender for a discount).
- Your property value has fallen or your LVR is still over 80%. This could see you pay lenders mortgage insurance again.
I have some more questions about refinancing
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