Top 5 Reasons To Consider Refinancing

Disclaimer: The below guide is general in nature and do seek individual financial advice to see how this applies to your situation. Our experienced advisers are on hand to help at no cost to you (T’s and C’s apply)

Firstly, let’s make sure we’re on the same page with the right terminology. Often I hear “refinancing”, “refixing”, and “restructuring” getting mixed up.

Refinancing

Refinancing simply means moving bank - replacing the mortgage at your current bank, with a new mortgage at another bank.

Refixing

Refixing means choosing a new rate for your existing loan with your existing lender.

Restructuring
Restructuring means breaking up or combining your existing loan(s) with your existing lender to change the structure of the loan.

For example: $500k loan is “restructured” (broken up) into 2 equal parts. This could allow us to fix $250k on a 1-year fixed term, and $250k on a 2-year fixed term.

When is it a good time to consider refinancing?

In New Zealand, nearly all banks will offer you a ‘cash contribution’ when you take out a mortgage loan. Banks offer this money to encourage us to take out lending with their bank in particular.

This is cash for you to spend as you wish! But there is one condition - if you refinance (move banks) within a certain amount of time, you will need to repay some, or all, of this cash contribution. In industry lingo, this is called a “clawback period”.

Cashbacks, (and clawback periods), are relevant factors to weigh up when considering whether it is a good time to refinance a loan.

If your loan is new, the benefits of changing bank may be outweighed by clawback costs. In this circumstance, it may be better to consider refixing with your current lender. Speak to your adviser for these calculations.

Often it’s good to start these conversations after you have been with your bank for about 3 years (or approaching this). Different banks have different clawback periods on their cash contributions, but 3-4 years is common.

Why would I want to refinance?

Here are 5 potential benefits you may get from refinancing.

1 - Another cash contribution

Generally, banks do not offer further cash for staying with them longer than their clawback period. If they do offer further cash contributions, they are often less than what you might get from moving to a new lender.

A new bank will likely offer you some cash to move your loan (refinance) to them. The amount varies depending, but often can be thousands of dollars for an average sized loan.

Again, you can spend this cash as you wish, including using it to pay your mortgage.

2 - Better interest rates

Many people believe that years of loyalty to a bank will mean that they are offered better deals. In our experience the opposite can be true; the best deals are often offered to new clients.

What if the rates with my existing lender are better?

Absolutely, it’s worth comparing the rates offered by your existing lender against those offered by other banks, as well as other terms and conditions, to find what is right for you. Even if the rates of your current bank are better, part of our role as advisers is to negotiate with lenders who may be willing to match the rate you’ve been offered by your existing bank.
In these situations the rates at other banks may not necessarily be better but equal, and the cash contribution makes the difference.

3 - A fresh 30-year loan

Depending on your situation, this might be an advantage or a disadvantage. As I’m writing this (December 2023), interest rates have been rising for 3 years+ and some borrowers are finding the rising interest costs challenging. Most loans start with a 30-year term. If you have had your loan for 5 years, you may only have 25 years left. Refinancing to start again with a new 30-year loan could lower your regular repayments.

However, the downside obviously is that it will take longer to repay the loan, and this isn’t to be taken lightly. But it can be suitable for some clients.

If you wish to keep your remaining loan term the same with your new lender, this is usually not a problem.

Tip: age can be a factor that lenders consider when offering loan terms. Speak to your adviser for more info.

4 - A chance to top-up the home loan, or consolidate debt

Refinancing doesn’t mean that we need to keep the exact same loan amount as we have with our current lender.

Often clients want to look at topping-up home loans for renovations, repaying a family member, consolidating credit card and other debts, or for many other reasons. Some lenders even have special offers for buying insulation and electric cars.

Getting that same top-up from your current lender will mean you still need to collect all your documents and apply; why not consider applying to a new lender and get the above benefits too?

5 - Legal and adviser costs covered

New Zealand banks will cover your adviser’s fees in helping you to refinance, see T’s and C’s.

Usually when refinancing, your solicitor will be involved in signing the loan documents. Costs vary, but a very rough estimate for this at the time of writing is approximately $1,100 - $1,500 (but do check with your specific solicitor!) Some lenders have their own in-house legal team that can help you to refinance - at the bank’s own cost! Note that not all banks offer this, check with your adviser if this applies.

If you think refinancing may be an option for you, call one of our advisers, or complete our quiz here.

Is there any reason I wouldn’t want to refinance?

Here are just some of the reasons you may want to stick with your current lender.

• You intend to sell your property within the next 3 years

• You want to pay off the loan completely within the next 3 years

• Your existing loan is on a much lower rate than what can be matched elsewhere

• Your existing bank has a considerably better offer (ask your adviser to do a side by side comparison before committing either way)

• Your income and equity in your house will be assessed; if either of these don’t meet the new bank’s requirements, it may be challenging.

• If your loan is over 80% Loan to Value Ratio (that’s the amount of loan you have compared to the value of your home), then it gets a bit more complex. Again, speak to your adviser if this is your situation.