The pros and cons of refinancing your mortgage
Why switching to a new mortgage lender is always worth considering
2 August 2023
This article has been produced by mortgages.co.nz, who provide expert independent home loan information to help Kiwi understand the options available to them.
Most people have a mortgage for a very long time, so at some point things are bound to change - often sooner than expected. The important thing during times of change is to make sure your mortgage continues to support your situation and future goals as strongly as possible.
If completing a mortgage application and finally getting approval is still fresh in your mind, probably the last thing you feel like doing is revisiting the whole thing, just because something’s changed. But most experts would say that’s exactly what you should do. Having the best possible mortgage set up for your new circumstances can make a huge difference to your immediate and long-term financial wellbeing. It can also remove a lot of unnecessary stress and worry.
This article looks at what refinancing is, why people consider it, and the pros and cons they typically discover.
What you'll learn:
- What is mortgage refinancing?
- Refinancing vs restructuring vs refixing
- Why do people refinance their mortgage?
- What are the downsides of refinancing your mortgage?
If you’re reading this because you’re about to miss a mortgage repayment, you should contact your lender as soon as possible. They may be able to offer something like a brief repayment holiday while you get some help to find a more permanent solution.
What is mortgage refinancing?
What’s the difference between refinancing, restructuring and refixing? It’s a common question that demands an accurate answer:
- Refinancing a mortgage means arranging a completely new one, often with another lender, and using that new mortgage to immediately repay your old one.
- Restructuring a mortgage is different. That’s when you change the way your mortgage is set up with your current lender. For example, you might decide to split your mortgage over more than one fixed interest rate term, or you might decide to add an off-setting loan to your mix.
- Re-fixing a mortgage is simply choosing a new fixed interest rate term when a current one comes to an end.
Why do people refinance their mortgage?
The main reason is to get a better deal than their current lender is willing to offer. But everyone’s circumstances are different, so what constitutes a ‘better deal’ can be quite different from one person to another. Here are the usual reasons for refinancing:
- To get a lower interest rate.
- To get a longer term, so that repayments are reduced.
- To get some instant cash, because the lender is offering a substantial cash incentive, just to win your business.
- To get cash for another project. You might have built up equity in your home that you want to release to support another life goal or property purchase.
Refinancing offers more than getting a better deal, it could allow you to free up some cash.
Many of these changes might be achievable with your current lender, but it’s usually a good idea to check what other lenders would offer at the same time. One of the easiest ways to get a broad view of the market is to talk with a good mortgage broker. Their knowledge, experience and connections with the main lenders can help you find something you may not have realised was possible. Brokers are paid by the lender you decide to switch to, so there’s normally no extra charge for you.
If you’ve already refinanced in the last few years, you may be wondering if it’s too soon to do it again. It turns out that most financial advisers recommend an annual mortgage review with refinancing as a possible option.
What are the downsides of refinancing your mortgage?
When you take out a completely new mortgage and use it to immediately repay your old one, there can be costs involved. It can also take up quite a bit of your time. But a new lender may be prepared to help cover some of the costs, plus a good mortgage broker can add expertise and save you a lot of time with the application process.
To help you prepare for a meeting with a lender or broker, here are some of the possible costs when refinancing your mortgage:
- Break fees – if your mortgage is still on a fixed interest rate you may have to pay early repayment fees, particularly when interest rates have dropped
- Incentive clawback – if you accepted an incentive (such as a cash payment) when taking out your current mortgage, you may have to repay all or some of it
- Lawyer fees – taking out a new mortgage and discharging your old one requires a lawyer to ensure the old mortgage is discharged as expected and your property’s title is updated
- Valuation fee – your new lender may require a fresh registered valuation of your property
- Mortgage discharge and establishment fees – your old lender will usually charge an admin fee to discharge your mortgage and the new lender may charge an establishment fee
- Changing your automatic payments – if you move your everyday banking as well, it can take some time and effort to ensure all your direct debits and automatic payments are switched to your new account