Surge in mortgage inquiries after official cash rate cut to record low

Cameron Mackenzie, with wife Sarah, who recently broke their mortgage for a better rate. Photo / Supplied

An Auckland couple are saving at least $4000 on their annual mortgage repayments after breaking their fixed-term contract early and signing with a new bank.

A mortgage broker says she has been inundated with inquiries from homeowners looking for better mortgage rate deals since the Reserve Bank slashed the official cash rate (OCR) to a record low 1per cent last week.

But a financial columnist is warning those considering breaking their fixed-term contract that bank penalty fees may mean it's not worth it.

Cameron Mackenzie, who works in the shipping and logistics industry, said he and wife Sarah bought their Glen Innes property about five years ago.

But after watching rates drop for several years while their fixed-rate remained unchanged, Mackenzie sought advice from a mortgage broker.

"By sticking with my current mortgage rate which was about 4.89 per cent, I was losing over $4000 a year by not fixing the current mortgage rates which were at the time about 3.89 per cent," he said.

"It made me wake up - I thought something could be done and we needed to figure out how much it was to break and find a bank who was willing to match the break fee or close to it."

With the help of Loan Market mortgage adviser Megin Wilton, the Mackenzies managed to get a lower mortgage rate this year with another bank.

The Mackenzies also struck a deal with their new bank, Westpac, which meant the break fees would be paid to the outgoing bank, ANZ.

Cameron Mackenzie, with wife Sarah, who recently broke their mortgage for a better rate. Photo / Supplied

"We will definitely chew through [our mortgage] a bit faster with our new finance," Mackenzie said. "Hopefully, we can knock it off within the next 10 to 15 years."

Wilton said an incoming bank might offer a cash contribution to help homeowners alleviate the outgoing bank's break costs, but this was on a case-by-case basis.

Since last week's shock OCR drop, she said she'd been inundated with clients exploring their mortgage options, and asking whether they should break.

Several people with settlements looming were also asking if they would benefit from the rate cuts.

Wilton said it was hard to judge because the OCR cut didn't mean banks would automatically follow suit.

"For Cameron, it was better to break prior to the OCR so the break costs wouldn't have been higher and it worked out more beneficial for him," she said.

"The rate that he's got now is in line with the discounts that the banks have been giving after the OCR as well."

Reserve Bank of New Zealand Governor Adrian Orr after announcing the official cash rate. Photo / Mark Mitchell

John Bolton from Squirrel Mortgages told the Business Herald last week it "generally" didn't pay to break a mortgage.

"The break cost that the bank is going to charge you will largely offset the benefit from breaking," he said.

"If I thought rates were going up it might be an opportunity to break but given the expectation rates could fall further between now and the end of the year, I'd just hang out and wait.

"Most people are on relatively short-term fixed rates anyway and a lot of people have the loan split so generally speaking, most people will be able to take advantage of this shortly."

Personal finance columnist and author Mary Holm said mortgage break fees varied widely.

It depended largely on how much the lender stood to lose if a customer repaid a fixed mortgage early.

"Generally, if you are going to gain a lot by moving to a much lower interest rate for quite a long period, the break fee will be high. Your gain is the bank's loss. So it will probably not be worth doing. And if you're going to gain just a bit, it's probably not worth the hassle.

"Still, it doesn't do any harm to ask."

New Zealand Bankers' Association chief executive Roger Beaumont declined to comment on whether banks had seen a surge in people paying break fees.

But he said anyone thinking of breaking their fixed home loan should take several things into a account.

"It's a good idea to calculate the potential interest rate savings for the balance of the fixed period against the break cost.

"Then you can make a carefully considered decision and not just chase a cheaper rate.

"Your bank should be able to help with this comparison."

Wilton urged homeowners who wanted to explore options around their mortgage payments to seek expert advice.

Mortgage advisers would give the client's existing bank a chance to offer their best deal while finding what other banks could offer, she said. If it didn't work out, clients would likely be charged mortgage break costs by their bank.

"Normally, if the client wants to break and refix for a lower rate then the bank is going to lose money on that. If it's a lower rate, they're losing out," Wilton said.

"If you were going to [a higher rate], they're not going to charge you because they're going to make more money when they on-sell it."