Refinancing Considerations

“If you fail to plan, you are planning to fail!”

Picture this: you’re lounging on your deck soaking in those last few rays of autumnal sunshine, sipping a freshly brewed coffee and secure in the knowing that your mortgage is working for you, not against you.

However, with many Kiwi’s mortgages coming up for renewal over the next six months, the pain of moving from the low rates offered during the pandemic to what’s currently on offer might mean the above vision feels far-fetched. 

According to recent data from Stats NZ, in the year ended June 2023 average mortgage payments increased 27.5 percent. In monetary terms, this means that the average weekly expenditure on mortgage payments rose to $605.60, compared with $475.00 in the previous year, making it the biggest single-year increase since the Global Financial Crisis hit in 2008.

Put another way, on a $750,000 loan, for borrowers moving from a 2.69% three-year rate to a new rate of 4% or more this would equate to another $30,000 per annum in interest payments that a household needs to find. 

But with the OCR holding steady, and interest rates stable – or in some cases dropping – there are options available to property owners whose mortgages are coming up for renewal over the next several months.

Whether the objective is to curtail interest expenses and just survive the higher interest rates, or expedite loan repayments, proper planning and preparation at least 90-days out hold the key to significantly impacting your financial outcomes.

So, what are the key factors to consider when your mortgage is coming up for renewal?

Assess Personal Financial Objectives and Circumstances:

When you have about three months left on your mortgage term, it can be good to look at your financial goals and circumstances. Are you aiming to reduce monthly outflows, shorten the loan tenure, or leverage equity for other investments? Aligning refinancing goals with your individual financial aspirations lays a solid foundation for decision-making and will help inform what will be the most suitable refinancing strategy for you.

Compare Lenders and Loan Products:

Once you get to 90-days out, we recommend talking to your mortgage adviser and starting to look at what lenders are offering. Refinancing, where you explore options from different lenders and loan products, may help you to secure better terms. Beyond scrutinising interest rates, it is important to also consider factors like the length of you loan term, repayment flexibility, associated fees, and potential cash contributions from lenders. Currently, some lenders are paying $9,000 per $1 million of lending pro rata, so there is the potential to receive $5,000 – $10,000 in a lump sum payment when you do refinance. 

This is where our team are worth their weight in gold. We will help you to understand and compare what options are available to you and what lender, product and loan structure is right for you. It can be complicated, but we will help you navigate all the options. 

Harness Lump Sum Repayments:

Windfalls such as bonuses, tax refunds, or inheritances represent opportune moments to channel additional funds towards mortgage repayment. Statistics reveal that making lump sum payments can significantly diminish mortgage liabilities and enhance long-term financial well-being. According to Stats NZ, in 2023, 45% of homeowners who refinanced their mortgage made extra repayments, contributing to accelerated debt reduction.

If you think you might be able to make a lump sum payment over the period of your loan-term, it may be worth considering floating a portion of your loan so that any extra payments you can make won’t incur penalties.

Leverage Mortgage Offset or Revolving Credit Accounts:

If you are looking to optimise interest savings, mortgage offset or revolving credit accounts can be a valuable resource. These accounts, when linked to the mortgage, can enable you to offset your loan balance with funds held. By maintaining higher balances in these accounts, you can minimise the interest accrual on your mortgage, which can help you to realise substantial cost savings over the term of the loan.

This style of account can also allow you to reap the benefits of any savings or “rainy day money” you may have set aside. We often run into new clients with $50,000 rainy day money in a savings account.  At 7% interest, linking your saving to your mortgage through an offset or revolving credit account can provide a mortgage interest saving of $3500 per annum.  Also, as you are reducing an expense (rather than earning an income via an investment) this is effectively a tax return, whereas in a savings account you would be paying income tax on the amount held.

Exercise Caution with Loan Term Extensions:

Extending your loan terms can be worth considering when times are tough as this can help with cashflow during times when high rates prevail. However, while extending the loan term may offer temporary relief in the form of reduced monthly obligations, it often entails heightened interest expenses over the loan’s lifespan.

Before looking at loan term extensions, we can work with you to look at alternative options to help with short-term cashflow issues, while minimising any negative impacts over the longer term.

Smooth Out Your Payments Over the Longer Term

Depending on your finances, we recommend considering overpaying your loan when interest rates are lower – ie pretending your rate is 6% when it’s actually 2.69%. As rates increase, it means you are safeguarded to some extent as you have already factored higher repayment levels into your budget, along with having had the benefit of paying off the loan faster while rates are low. 

In real terms, this would mean that a $500,000 mortgage over 30-years would be $3276 per month. However, moving to a 25-year term would equate to payments of $3486 per month, so not a huge increase in monthly payments but you will save $133,608 in interest over term of loan and clear your debt a lot faster.   

Consider Consolidating Debt:

Debt consolidation involves combining all your debts into your mortgage, which usually has a lower interest rate than other types of debt. For example, drawing down a $20,000 personal loan with an interest rate of 20% over a five-year term would require payments of $530 per month. Alternatively, if you add this same amount to your mortgage, based on the current average rate over a five-year term, your payments would be $395 per month. Or, extending this out to 15-years, your monthly payments would be $178 per month.

However, while this can help reduce your overall monthly expenditure, it is crucial to maintain a high level of discipline and to avoid incurring new short-term debt.

Work Towards Having a Six-Month Buffer

If you can trust yourself not to spend it, we recommend having a revolving credit or offset buffer of at least 6-months’ salary. This should be an undrawn limit with the bank, with your cash being linked to the mortgage to save interest. 

The old saying that the bank gives you an umbrella on a sunny day but asks for it back on a rainy day is true.  If you lose your job or end up with health issues, you are much better to have the facility limit in place before times get tough, as the bank may not be able to approve it when the going gets tough.

Undertake a Broader Review of your Finances:

Tunnel vision can be deadly when it comes to managing your finances. Undertaking a full financial health check can help uncover areas for potential savings, ensure that you are adequately covered in relation to your insurances, and that your strategy will help you to not only hit, but expedite achieving your financial goals. When undertaking our reviews, we frequently identify tax or other savings that can be had, which all help in moving you closer to achieving your financial goals.

Navigating the complexities of mortgage refinancing is tough at the best of times, but with average mortgage repayments rising so significantly it is worth seeking expert help. This is where our team’s expertise truly shines. We can help you work out what the best options are for you whether you want to reduce your expenditures, manage cashflow, release equity, or pay off your loan faster.

If your loan is coming up for renewal this year, make a note to get in touch with us about 3-4-months in advance of your term coming to an end. We will undertake a free financial review and provide you with personalised insights, comprehensive analyses, and advice about how to refinance your loan and make your financial aspirations (and the vision we outlined at the top of this article!), a reality.