Refinancing your mortgage will often make sense but it is also one of those decisions that should not be taken lightly.
Get this right and you could save literally thousands of dollars, but the implications of getting it wrong have the opposite effect – it can lock you into an unsuitable mortgage set up and end up costing you more or just not saving you anything.
Why Do People Refinance Their Mortgage
There are lots of reasons for people to consider refinancing their mortgage.
Some of the more common reasons are;
A bad experience with your bank – most people can tell a story where they have had a bad experience with a bank and while many people just shrug their shoulders and get on with life, other people will get really annoyed and change banks. Sometimes the issue is with bank policy, sometimes it is due to a poor experience with a staff member and of course there are times when it is really the customers fault.
I personally had a bad experience with BNZ which has stuck in my memory for over 20-years. This happened when I was going on holiday to Queenstown and so called into the bank (before internet banking was really a thing, or at least before I had internet banking) and transferred money from my savings account to my cheque account which my Eftpos card was attached to. When I got to Queenstown and tried getting money out it showed that my funds were not cleared funds; hence I couldn’t get any cash out and the bank was closed. Luckily I had a credit card so could access money to ensure my weekend was not a total flop.
What really annoyed me though was not the fact that I could access money – it was the attitude of the lady at the bank when I asked on the Monday what had gone wrong. She told me that it was my fault as I should have asked for the funds to be ‘cleared’ and I hadn’t … but as I explained I never knew I had to ask for this as the money had been in my other account for months.
I closed my accounts that day and vowed to never return.
Crazy bank criteria – each bank has ‘policy’ which dictates what they can and cannot do and at times it seems to make no sense. The banks create these policies in a similar way that a small organisation may have rules and guidelines but the bank policies often take a blanket approach and therefore restrict what the banks staff can do. What this means is often the banks seem to make decisions that seem illogical and cause people frustrations to the point where they want to refinance and shift to another bank.
Better interest rates offered or advertised – it is almost impossible for any bank to have the best interest rates all of the time so there will almost always be a bank advertising a lower interest rate. People will often hear about a lower interest rate with another bank and so approach that bank with the view of refinancing their mortgage.
The reality is there is no bank that will always offer the lowest interest rates.
What you do want is a bank that consistently offers competitive interest rates, but more importantly allows you to pay off the mortgage faster which will save you a lot more over time.
Freebies – some people are attracted to marketing of free trips, televisions, mobile phones and other ‘stuff’ that might be seem attractive. It constantly amazes me that some people will make such a large financial decision based on what they see as a free gift.
A couple of years ago we arranged a refinance for an accountant and her sole focus was the free iPhone being offered at the time by the bank. I showed her why financially it was not a smart decision, but she was so fixated on getting a new iPhone that she did not see common sense.
Banks and their marketing experts know that often people will make decisions based on freebies rather than a lower interest rate or a more flexible mortgage. In the case of the lady choosing the iPhone she could have purchased more than two iPhone’s with the savings she could have made by going with another bank.
The desire to support a Kiwi bank – a lot of Kiwi’s really would prefer to support a bank that is owned by Kiwis rather than Australians. The most obvious bank that promotes this is Kiwibank, but there are a few others including Co-Operative Bank, SBS Bank and TSB Bank which all have fully featured home loans and offer competitive interest rates.
As New Zealand mortgage brokers we have access to Kiwi owned banks and will always consider them when looking at options for refinancing your mortgage.
There is also Heartland Bank which is a kiwi owned bank and they have just entered the home loan market again with an online application but the rates advertised are not competitive when compared to the other banks and there is very little detail available to enable us to assess this as an option. At this stage there processes do not allow for mortgage brokers for home loans, although we are able to use them for other products – small business loans and reverse equity mortgages.
To separate lending over various properties – it is common practice for property investors and self-employed people to keep any investment or business lending and banking separate to their personal lending and banking. Of course the banks do not agree with this approach as they like to have everything all tied up so they effectively have everything and they will argue that this allows them to offer a simpler banking experience with better level of service and lower rates. Using this argument many people have gone ahead and put all their eggs in one basket so one bank has all of their banking including lending, savings and investment (including KiwiSaver) and even insurances.
In recent times with the Reserve Bank changes to lending rules this approach has caused a lot of issues and restricted many people from doing what they want, and at times causing financial losses as people miss opportunities.
To get money to start a business or invest – often people will approach their existing bank requiring money to start a business or to invest in something only to find that there are too many hoops to jump through. Banks will normally want a lot of detail on what you are wanting the money for and want to see a business case to show how the business or investment is going to be managed and to ensure that you will not lose money. The “Kiwi way” is often not that structured and people just want to roll up their sleeves and get on with things. You may know that there is a risk and be prepared to accept a loss if your idea doesn’t work; however banks may not allow you to do that.
Recently I had a call from a couple that wanted to buy a boat for commercial fishing charters which their son would operate with mum and dads help managing the bookings and finances. They had approached the bank and been told “NO” as the business model was too risky. These people were in a very good position and they ended up buying the fishing boat treating it as a family fishing boat rather than a business venture and the bank were totally okay with lending them the money.
They got what they wanted (the boat) and I believe they will use it for more than just family outings.
Of course if you want to start a business or make an investment you need to do your due diligence.
Long-Term Thinking Is Needed
In life and especially when looking at finances it is easy to make decisions based on what looks okay now, without thinking or planning for what might be best over the longer term.
As mortgage advisers we try to establish an idea of what is needed both now and in the medium to long term as it is better to get the correct lending in place that allows for potential changes while you can, rather than be put in a situation where finance is not available when you need it.
Short-Term – you may need to tidy up some debt, finish some renovations or borrow some money for investment.
These are the immediate or short-term needs but they will most often not need to be repeated.
When you refinance your mortgage it is always a good opportunity to tidy up any small debts, any overdue bills or taxes and to make sure that any outstanding maintence is completed. Most people that I talk to have some things to tidy up, but often there are some financial problems that need to be sorted out too and that is why some people will talk to a mortgage broker rather than a bank.
When you ‘fix’ a short-term financial problem you may need to use a non-bank lender that specialises in these issues, and that may be a more expensive option than what you would want long-term.
Another common reason people
Medium-Term – over the years your needs will change. The key thing is to have some flexibility so you can save money when you can but also access money when needed.
You may be young and want to start a family which could mean a period of time on a single income.
You may have a health issue or a problem with your job meaning that your income reduces or even ceases for a period of time.
You will no doubt need to replace a vehicle and some home appliances over time and therefore need access to money for those purchases.
There are some things we can plan for in advance, but we also know that life will throw up some surprises. Of course for some of these you might have insurance but it’s always best to have access to money should it be needed. A well structured home loan will allow you to have access to money without the need to get bank approval.
In my first year as a mortgage broker I remember arranging a loan for a man in South Auckland. This man was a truck driver and owned two properties. He had been working hard and paying off his loans a lot more quickly than the bank required so when I met him he had a very small amount owing. He approached me after being declined for a loan top-up from his bank.
He was in need of a hip operation as he was struggling getting in and out of his truck and therefore was unable to work. He was on a waiting list for a hip operation but approached his bank for a loan of $16,000
Long-Term – the long-term goal should be to pay your mortgage off and pay this off as fast as you can.
Nobody really wants a home loan, but to get the home that you want it will most often cost more than what money you have sitting in the bank and for that reason we need to borrow money. So while we accept that we need to borrow money we ultimately want to pay off the loan as fast as we can.
The reason that you would refinance your mortgage should be for the long-term even if it means that there is a short-term issue to be addressed first.
I recently reviewed a home loan for some family friends who were 1-year into a 30-year mortgage of approx $560,000 and which was costing $1,545 a fortnight. They therefore had another 29-years on their home loan to go before they could really say they own their home and they were questioning what they could do to pay the loans off faster as it seemed to have hardly reduced in the first year.
When we discussed their finances I found that they also had two other debts; a loan of $14,688 with Avanti Finance which is costing them $593 per month at an interest rate of 19.95% and a personal loan with GE Money at 29.95% which they are paying $100 per week on. These types of loans are expensive but like many people they had not really considered the actual cost.
I suggested that we should consolidate the short-term debt into the mortgage to reduce the interest costs. We could have consolidated these loans and had them paid off over the same 29-year term and the fortnightly cost reduces from the $475 they are paying now to $65 per fortnight but they were quite comfortable paying the same loan repayments of $475 on their mortgage.
By consolidating the short term debt and keeping the repayments the same they are able to pay the mortgage off in 18-years instead of the 29-years they have remaining. The interest that they will save by doing this is a staggering $269,917 but like most people they could be a little more careful with their spending, and I suggested that they contribute another $100 per week which cuts another 3-years off the mortgage and save another $59,719 in interest costs (total savings of $329,636).
This was an example of an initial short-term savings, but more importantly this almost cut their mortgage term in half. The savings were not insignificant and the reality is that the $300,000 of savings could be better used by our family friends than adding to the banks profits.
What would $300,000 buy you?
Maybe the Aston Martin is not the best way to spend your savings.
Getting The Right Loan Structure
People often focus on the interest rates as this is a simple way to compare loans, but the rate that you reduce the debt should be more important and this means getting the right loan structures and ability to pay more should be the priority.
It’s about getting your money working best for you so you can reduce debt but also access money when needed.
You might have heard about revolving credit home loans, offset mortgages, fixed rate plus floating home loans and concepts like total money. There are lots of different options and is important to select the right loan structures to suit your income, the way you get paid and of course the way you spend money too. Some banks and lenders offer variations which enable you to pay off your mortgage sooner and other offer interest only options which might help at certain times too. When
Banks are generally lazy and will try to keep things as simple as they can. Banks are also in the business of making money and often we see times when banks have set up overdrafts or personal loans where an increase to the mortgage would have been a lot cheaper for you, but made less money for the bank.
As an advisers I will take a little more time to ensure that we understand your situation and then make recommendations that suit.
A home loan can be split up into a few loans to give you the combination of;
- Security of knowing your repayments
- Ability to pay the loans off faster
This means taking some time to ensure that it is set up to suit your budget, your situation now, your future situation and of course the way you live your life. A well structured home loan needs to be thought out to suit you – not an off the shelf solution.
Most often a home loan will include a combination of loans such as;
Fixed Loans – these offer security for the fixed period of the loan but are not very flexible. Typically you would not put all of your loan amount on the same fixed term as this means that it all comes off the fixed term at the same time. For most people splitting this into a minimum of two loans is better.
Floating Loans – the problem with a floating loan is that interest rates could increase, but they are more flexible and you can pay lump sums off a floating loan where with a fixed loan you need to wait until the end of the fixed term before you can make a lump-sum repayment.
Revolving Credit Loans – a revolving credit home loan is like a big overdraft. They are a transactional bank account meaning they are very flexible so you can deposit money and withdraw money as required. The interest is calculated daily on the outstanding balance and charged to the account monthly so you are only paying interest on the money that you use. Revolving credit loans are often an integral part of any debt reduction programme but it needs to be managed carefully to maximise the benefits.
Offset Loans – some banks offer offset loans which mean that a savings account can be linked to a home loan account and you only pay interest on the net amount. So say you had a loan account with a balance of $100,000 and a savings account with $20,000, then you would only pay interest on the $80,000 being the difference between them.
These are four of the more common loan types and to confuse things the banks all tend to have different names for them.
Too often we see people with home loan structures that have been set up to keep things ‘easy’ for the banker or the customer (you) but by doing so you are missing out on the savings and opportunity to pay your mortgage off faster. The banks do not mind as they make more money, but you should certainly mind as you may be paying the banks a lot more than you need to.
Taking 30-minutes extra to ensure that you get things right might save a load of stress and save you some serious money too.
Beware Of Debt Reduction Specialists
Over the years we have seen a lot of people promoting themselves as debt reduction specialists. These people tend to ‘sell’ a service that shows you how to pay your mortgage off faster and justify their cost on the basis of what you will save. It is not uncommon to hear about people paying in excess of $3,000 for someone to create ‘a plan’ for them plus often the implementation means that you also means refinancing your mortgage which they will manage and get paid for too.
A debt reduction plan is really quite simple and should never be this expensive.
As a mortgage adviser I have established plans for hundreds of people to pay their mortgages off more quickly. This is included as part of what I do and therefore you will not pay for this advice, which means you can apply the money that would otherwise have been paid in fees to reducing your mortgage.
We recently had a client contact us after speaking to a debt reduction specialist who claimed to use a patented mortgage repayment formula to help them become debt free sooner. They call themselves highly trained financial coaches instead of debt reduction specialists, but they are really the same.
Our client had been in a difficult situation a year ago when they first contacted us requiring help to get out of a second tier lender and the high interest rates. We had managed to arrange to refinance this lady to TSB Bank and at a very competitive 1-year rate and it was time to negotiate some rates to refix, but at the same time there was an opportunity to restructure things so she could pay her loans off faster.
Before contacting us she had spoken to a financial coach and been given some ideas for a structure that was going to mean she would pay her loans off faster. Unfortunately she had paid over $3,000 for this advice, a plan (report) and some pretty ordinary software. The plan she had was technically okay having been designed by an accountant; however it did not suit this lady and made no allowance for her ‘real’ spending habits, the fact she is human and her longer term plans. In short, it wasn’t going to work.
We have since sorted her out with a loan structure and plan that will work for her and as part of our ongoing service we will review this annually with her to keep her on track and make adjustments as necessary. As well as this we have introduced her to some very smart Kiwi built software that will help her monitor her spending and manage her budget without the onerous data entry which most people will never keep up to date.
This is one recent example of a debt reduction specialist that charged a exorbitant amount and was never going to get the desired results for our client.
Instead we have restructured her loans to ensure that she will pay the mortgage off much faster and retained the flexibility she needs for the years to come. It was a better result and we charged her nothing to get this done.
Free Mortgage Refinancing
They say nothing in life comes for free and this is true also when you refinance your mortgage.
It may seem like it is free because there may be no cost to you (if the bank pay your legal fees etc) but there is a cost for the bank and solicitors costs.
What often happens is the banks will provide an incentive to get new business – your mortgage business.
The bank may work out that the average home loan stays with that bank for ‘say’ 7-years and that a high percentage of those people with a home loan will also have bank accounts, maybe insurance and also maybe KiwiSaver which all help the bank may a profit from you. Add all of this together and the bank can then calculate the overall profit and therefore determine what incentives they can offer you. Most banks will offer a cash incentive to attract new customers with mortgages (home loans) to cover your costs to changeover to the new bank, but with these cash incentives generally comes a condition that you repay the cash incentive if you shift your mortgage away from that bank within a 3-year period.
So while it appears that you are not paying for refinancing your mortgage and at times may even make a little from the process, it is important to understand that the banks are very good at making money and they will be aiming to make money from you.
You need to be aware of this and be careful to ensure that you are getting value for the other services too.
How Do Mortgage Brokers Work For Free?
Many people think that mortgage brokers work for free.
While in most cases you will not pay for the services of a mortgage broker, it does not mean they work for free. The fact is that in most cases the banks will pay the mortgage broker for sourcing them business and managing the loans on an ongoing basis, and because of this the broker does not need to charge you.
There are exceptions where a mortgage broker may need to work with a lender that does not pay the broker or additional work which is outside of the normal scope of work. When these occasions arise the broker will advise you of any potential fee before you commit to anything, and then it is your choice whether yo proceed or try to find someone else that may do the work for free.
Having a good mortgage broker that you can work with can create huge value saving you both time and money. With the ability to be able to access their knowledge and then also do the work for you both sourcing the loans and managing the loans it really does make a lot of sense and saves you lot’s of money too. As we saw with the lady that engaged the financial coach, she would have saved over $3,000 by talking to me first.
In the mortgage broking industry there has been talk about brokers charging fees for their service and this may happen at some point in the future but at this stage that has not happened.