When it comes to managing your finances, one of the most valuable decisions you can make is to refinance your mortgage. Refinancing is the process of restructuring an existing loan or possibly replacing it with a whole new loan, to achieve better financial terms. You might want to shorten the term, secure a lower interest rate or change the loan type to benefit from reduced monthly repayments or access equity. Here’s how refinancing could save you thousands and help you take control of your financial future.
What is Mortgage Refinancing?
Mortgage refinancing process in NZ involves replacing your existing mortgage with a new one, typically at a lower interest rate. It’s like hitting the reset button on your mortgage. This process can potentially reduce your monthly payments, consolidate debt, or adjust the length of your loan, ultimately saving you money.
Key Benefits of Refinancing
- Lower Your Interest Rate
Interest rates fluctuate over time and with recent OCR and interest rate changes, it’s likely interest rates are lower than when you first took out your mortgage or your last fixed rate. By refinancing to a new rate, you could significantly lower your monthly payments. Even a reduction of just 1% in your interest rate can save you thousands over the life of your loan. For example, on a $300,000 mortgage, reducing your interest rate from 4% to 3% could save you around $3,000 annually.
- Reduced Monthly Payments
By refinancing at a lower interest rate, this reduces your monthly mortgage payments. This can free up cash for other expenses, living costs or financial goals, providing you more flexibility and increased cashflow.
- Shortening the Loan Term
If your financial situation has improved, you might consider refinancing to a shorter loan term, such as moving from a 30-year mortgage to a 20-year mortgage or even reducing mortgage years to less as 5 years. While your monthly payments may increase slightly, you’ll pay off your loan faster and save a substantial amount on interest payments for your retirement.
Example: If you kept your repayments the same for a $750,000 mortgage at a 6.5% interest rate but reduced the mortgage term from 30 years to 20 years you could save $279,173 on interest repayments over the complete loan term (e.g. $808,983 on 30y vs. $529,810 on 20y).
- Access Home Equity
Cash-out refinancing allows you to borrow against your home’s equity, giving you funds for major expenses such as debt consolidation or even purchasing an investment property. For smaller expenses like home renovations or buying a new car – this can be a cost-effective alternative to personal loans or a credit card. Consulting to your Adviser will help you to explore whether refinancing aligns with your long-term financial objectives.
- Eliminate Lenders Mortgage Insurance (LMI)
If your home’s value has increased and you now have at least 20% equity, refinancing can help you eliminate low equity margin (LEM) or ‘low equity premium’ (LEP). In other words, you pay a premium above the usual interest rate because you don’t have much equity (value above what you owe) in your home saving you hundreds of dollars each month.
Is Refinancing Right for You?
Refinancing is not a one-size-fits-all solution, nor is it necessary for everyone. However, there are certain scenarios where it makes more sense:
- Significant Rate Drops: If current mortgage rates are substantially lower than when you initially got your home loan.
- Improved Credit Score: A better credit score can qualify you for lower rates, making refinancing a great option for you.
- Mortgage Cashback: Cashback incentives are commonly offered by lenders, as a result of refinancing.
- Pay off your Loan Faster: If you plan to stay in your home for several more years, refinancing to a shorter term could help you pay down your debt faster.
Step into a new rate and terms that work better for you, get it touch.
Costs to bear in mind:
While refinancing can save you money, it’s important to understand some of the costs to do so. Common costs might be:
- Closing Costs: which can range from 2% to 5% of the loan amount and appraisal fees.
- Break-Even Point: Calculate to determine how long it will take to recover these costs with your new, lower payments. Also, if you don’t plan to stay in your home beyond that point, refinancing might not be worthwhile.
Refinancing your home loan could save you thousands. By lowering your interest rate, reducing monthly payments, or shortening your loan term, you can improve your financial well-being. Book time with a Financial Advisor to explore your options and bank some savings.
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