Do The Numbers Before Refixing That Mortgage
People have been considering breaking the rates as they continue to rise quickly, but there are pitfalls, writes Lucia Xiao.
30 November 2022
For most lenders you can lock in the new rate within 60 days of expiry, with the exception of ASB where you can lock in within 35 days, and the Sovereign/AIA home loan, where you can lock in within 45 days.
This means your mortgages will roll over to the new rates on the expiry date. If the rates increase, as you have locked in the rates, you will not be affected. Unfortunately, this also means if the rates decrease and you want to change with them, you would need to pay the break fee even if your existing loans have not expired yet.
You can complete this re-fix online or through the lenders’ mobile app, in most cases. Notable exceptions being: Sovereign/AIA home loans, where you have to go through a mortgage adviser as AIA GO Home Loan does not deal with clients directly, and Westpac, where only loans under personal names can be re-fixed online.
People have been asking us if it is worth breaking the rates as they continue to rise quickly. If you break the rate (changing the rate earlier than 60 days before expiry), you will be paying the new rate on the day you break it, eg if the renewal date is February 1, 2023, you will be paying the new rate from today, so you are ending up paying an additional 2-3 per cent for 3 months, while if you wait until you can normally lock the new rate, which is December 3, you would only begin to pay the new rate on February 1.
‘Currently, we do not suggest locking in a term more than 24 months’
TAB ON INFLATION
The benefit of not breaking the rate early would be a lower interest rate with a difference between now and December 3. In this case it would most likely not be worth breaking the rate as the total interest paid will be more than otherwise.
However, we would suggest doing the numbers on your own case, as generally the longer the new term and the earlier you break the rate (assuming interest rates will increase quickly before the expiration of your current rate and not fall during the majority of the term of the loan) the less total interest will be paid.
Currently, we do not suggest locking in a term more than 24 months as, in our opinion, inflation will most likely be under control in six months and we should see the rates begin to decrease in 12-18 months time. Please note this is not financial advice, and you should consult a financial adviser with your personal circumstances.
Usually spring is a hot season for the housing market, regardless of the fact that we are in a recession, as there are people that need to buy houses in school zones
and/or find a home before Christmas. Usually lenders run some campaigns during spring, and you may see rates vary due to supply and demand.
POWER OF ATTORNEY
If you currently reside overseas please note we cannot give financial advice to you as it falls into the other countries’ jurisdiction. For example, if you’re an eight-hour flight away from Auckland and you ask me, “Do you think I should break the rates?”, “What do you think I should fix for how long?” or “Do you think a one-year rate or two-year rate is better for me?”, we can’t give you advice.
We can bring you up to date with industry circumstances, like what the current rates are. We can also be responsible for executing a well-informed decision: for example, you tell us that you want to re-fix an AIA home loan for 18 months, which we are more than happy to arrange.
If you currently reside overseas we highly recommend you set up a power of attorney who can help you manage your finances here in New Zealand, as we are
able to provide the advice to your power of attorney.
So do you break the rates? As with many things in life, the answer isn’t simple. It depends. We obviously can’t give financial advice over a magazine article so it’s best to speak to your financial adviser to find the solution that puts you in the best position. Investing in your future is no easy task, and finding the right people to
help you navigate these choices now can have a huge impact on your position in years to come.