Refixing the mortgage? What you need to know to avoid a costly mistake

Mortgage refixing is a calculated game where decisions could save or cost you tens of thousands of dollars. Photo / 123rf

Homeowners are eagerly awaiting this week’s final Official Cash Rate (OCR) decision of the year as mortgages get set to roll over in the coming months.

But while interest rates coming down is good news for many, the temptation to refix at lower rates could be more costly in the long run.

Bruce Pitchers, Canstar NZ editor, said just because rates are coming down, it doesn’t mean you have to lower your repayments to match the lower rate completely.

“Chasing the lowest possible repayments might put more money into your pocket now, but could cost you considerably more in the long-term,” Pitchers said.

“Most Kiwi mortgages are for 25- and 30-year terms, but the longer the term, the more interest you’ll pay. So, when you’re refinancing, especially if you’re at the start of your home ownership journey, it could be tempting to refix at 30 years again – but you’ll end up paying far more interest than you will save in smaller repayments.”

Pay more, pay down faster

Pitchers said the sensible option with any mortgage is to pay what you can afford to the maximum extra-repayment limit set by your lender.

“If you can afford to pay more, do so, because in the long run it will save you money on your mortgage,” he said.

“Most banks let you make extra repayments to a set limit – which can save you tens of thousands of dollars and years off your mortgage.

“It’s a simple equation: the larger your repayments, the quicker you’ll pay off your mortgage debt.”

Pitchers said looking at a $400,000 mortgage, over 30 years at a fixed rate of 6%, by paying an extra $100 per month, you could cut three years off the life of the mortgage and save $55,759 in interest repayments.

“But unless you’re on a variable rate, most lenders set restrictions on making extra repayments on fixed rates, but there are considerable savings to be made over the loan term.”

Breaking your fixed term – is it worth it?

Because banks borrow money to lend to customers, they’ll charge a penalty – or break fee – to compensate for financial losses incurred if you pay off the loan balance earlier than your fixed term by switching to another bank.

This can mean hefty break fees for customers.

“If you’re going to break your mortgage, your lender is going to want to recoup all its costs associated with that mortgage – basically the interest repayments that you would have made that it’s going to be missing out on,” Pitchers said.

“If you’re halfway through a longer fixed-term mortgage, the break fee could be considerable, tens of thousands of dollars.”

Pitchers warned costs that needed to be considered weren’t just early termination fees, but also things like getting your home revalued for your new lender and possibly paying back any cashbacks you might have received from your old lender.

“You’re going to have to make sure any savings you’re likely to make will be worth the costs involved,” he said.

Nathan Miglani, managing director and senior adviser at NZ Mortgages, said around 40-50% of their customers were keen to break.

“As long as there is a financial benefit for people it’s always worth refinancing,” Miglani said.

“[The] majority of the clients for the last couple of years they’ve all fixed for one year, so I don’t actually see too much of an issue. Everyone’s going to be up for renewal over the next few months anyway.”

Getting a better deal

Often the best way to get a deal is simply to ask.

“Banks don’t post their best rates on their websites – so you’ll need to contact lenders directly to see what deal they can offer you,” Pitchers said.

“Or, if you prefer, talk to a broker, who can do the negotiating for you.”

Last month, OneRoof reported that ANZ had cut its one-year discretionary non-advertised mortgage rate to 5.59%, 60 basis points (bps) below the advertised special (6.19%) and standard (6.79%) rates on their website.

The Commerce Commission’s final report on personal banking, released in August, found discretionary discounting was a common feature of competition for home loans in New Zealand.

Pitchers said people also need to be aware that a lot of the banks are offering cashback incentives.

“And not just to first home buyers or new customers. Even if you’re an existing customer it pays to ask – you could find you get up to a 1% sweetener.”

How low can you go

Whether the Reserve Bank cuts the OCR by 25, 50 or 75bps on Wednesday, floating or shorter-term fixed mortgage rates will likely remain popular while interest rates continue to track down.

“If we are lucky we will see 4.99%, 4.89% for maybe two or three years before Christmas,” Miglani said.

“If we are not that lucky before Christmas we will definitely see a 4.99% for two to three years by February next year.

“50 basis points is a lot. Even if the banks actually end up passing on 30-40 basis points, it can make a sizeable difference.”

ASB and BNZ both currently offer the lowest standard two-year fixed rates at 5.69%.

Westpac is offering a special 5.65% rate for two years.

Cameron Smith is an Auckland-based journalist with the Herald business team. He joined the Herald in 2015 and has covered business and sports. He reports on topics including retail, small business, the workplace and macroeconomics.