Current economic conditions are making mortgage refinancing an attractive option for many homeowners in New Zealand.
As you may have heard, a number of the big banks recently slashed their fixed term interest rates. Depending on your situation, you could potentially save thousands over the course of your mortgage by switching to a new mortgage company and securing a new fixed rate home loan.
Read on to learn more about why banks are cutting their rates and what it means for you.
A quick recap on mortgage refinancing
Mortgage refinancing is a strategy that can help you meet your unique financial goals. It involves shifting your mortgage to a new lender in order to obtain a better interest rate or mortgage term.
There’s just one catch.
Most fixed loans come with hefty break fees. If you want to break the terms of your contract by getting out of your existing mortgage early, your lender will charge you a break fee to cover the interest they would have earned over the time remaining on your loan.
Break fees are based on complex formulas that vary slightly from lender to lender. You can use the mortgage break fee calculator over at interest.co.nz to get a rough idea of your break fee.
In addition to a break fee, you might also be lumped with some administration fees.
The start of the mortgage war
Historically, the cost of break fees has typically outweighed the benefits of refixing. However, this has started to change in recent weeks as many of the major mortgage providers jostle for customers in an increasingly competitive financial climate.
In November 2018, ANZ caused a stir in the industry when it began offering a one-year fixed-term 3.95 percent mortgage rate – the first major bank to do so since World War II.
A number of other lenders have since raised the ante. Three of the four major banks – ASB, BNZ and Westpac – are now offering 3.95 percent rates over three-year fixed-term home loans. For comparison, the average two-year rate was around 4.5 percent just six months ago.
What’s sparked this trend? There are a couple of key factors at play:
1. Increased competition
Firstly, there are the tougher lending laws. A few years ago, the government introduced new laws restricting the amount of low-deposit mortgage lending. These changes effectively made it more difficult for borrowers to get a loan, which has meant fewer new customers for lenders. This has encouraged mortgage companies to offer more competitive rates in an effort to attract new customers.
2. Low OCR
Secondly, there is the low official cash rate (OCR). The Reserve Bank of New Zealand recently announced that it would probably cut the OCR from its already record low of 1.75%. Many lenders have chosen to pass these savings onto their customers by offering reduced fixed home loan rates.
Should you refinance?
While some people will certainly benefit from switching to the new fixed rates, others will be better off avoiding the break fee and sticking with their current mortgage provider.
Whether or not you should switch to a new home loan hinges on your specific circumstances. The amount of money you could potentially lose or save by refinancing depends on a number of factors, including your current rate, the rate of the new home loan, the time remaining on your existing loan and how your lender calculates its break fee.
Regardless of whether you could save or lose money by switching, this is the perfect time to consider your options. The current competitive market favours borrowers quite heavily, and many mortgage companies are going out of their way to retain existing customers and attract new ones.
If you’re thinking about switching home loan products, we’re here to help. As independent mortgage brokers with more than 20 years of experience in the industry, iLender is the provider of choice when comes to getting a home loan in Auckland.
At iLender we put your best interests first and not the Bank - our advice is impartial as all Lenders who we do business with pay about the same in commissions.
Although we are Auckland based Mortgage Brokers, we help customers everywhere in New Zealand and overseas with buying property in New Zealand, as we are very much about online and giving advice here and now!