People often ask me if they should refinance their mortgage to take advantage of the current low rates. Some people have also been with their bank for several years, and they are now wondering if they should switch their mortgage to a different bank to receive the cashback incentive.

Taking the opportunity to secure a lower interest rate and receive a cashback incentive are good reasons why you should refinance your mortgage. But you should also consider other factors when making decisions around refinancing. 

Should I refinance my mortgage now even when my current interest rates are good ?

Video Timeline

1. Should you extend your interest only period by refinancing? –02:52
2. How can refinancing and using loan products, such as offset accounts and revolving credits, help me pay off my mortgage faster and save on interest? – 01:08
3. How can refinancing my existing mortgage improve my borrowing capacity?  – 04:08

As a guide, here are three ways to help you decide if refinancing is right for you:

1. Should you extend your interest only period by refinancing? 

When looking at mortgage repayment options, remember that different loan types offer different benefits. Interest only repayments are often a popular option for New Zealand property investors. It means you only have to pay the interest owing each month and nothing off the principal. Many of the major New Zealand banks offer short-term interest-only loans to help keep your repayments low. This short-term period is usually up to five years. But, a word of warning, if you think you may experience financial difficulties when you are required to pay back your principal after the period ends, it could be a good idea to refinance your loan.

When switching banks, you can still apply for another short-term interest-only loan at your new bank. This is one of the best ways to reduce your mortgage payments, and it gives property investors the ability to pay off any other smaller debts faster.

2. How can refinancing and using loan products, such as offset accounts and revolving credits, help me pay off my mortgage faster and save on interest? 

An offset account is one of the great loan products available from many of New Zealand’s major banks, such as Westpac and BNZ. An offset account is a transaction account linked to a home or investment loan. You only have to pay interest on the difference between the money you have in this account and the loan balance, which could reduce your interest payments and help you pay off your loan faster.

New Zealand banks also offer another great facility called revolving credit. It’s like a big overdraft, which allows you to pay off the loan or withdraw up to your limit, at any time. But different banks offer different limits. When you refinance, you can switch to a bank offering a better limit.

When you apply for a loan from Westpac, you can set a maximum term of 30 years. However, if you choose to pay more than the minimum monthly repayment, you could pay off your loan faster. If you decide to do this, it won’t negatively impact your borrowing capacity for future loans. What’s more, should your circumstances change, Westpac allows you to revert to your initial loan settings and extend the maximum repayment term to 30 years. This situation therefore allows you to reduce your regular repayments. However, the process is different with other major New Zealand banks. If your loan is not with Westpac, you need to make a formal application to the bank to extend the term of your loan, which is a time-consuming process. It is also likely that they won’t grant you an extension. If your extension is declined, it could make life even harder for you if you are experiencing financial difficulties.

3. How can refinancing my existing mortgage improve my borrowing capacity?

If you are thinking about increasing your property portfolio, you may be able to use the equity from your existing properties. But how can you obtain finance if you don’t have enough equity? The answer is: refinancing – and this can increase your borrowing power.

When you apply for a mortgage for your next investment property, your bank will calculate your borrowing capacity by analysing your income, expenses, existing loan structure(s) and other factors. The structure of your existing loans play a big part in this calculation. The different parts of your loan structure include: loan repayment types - interest only or principal and interest; loan type - offset account or revolving; and loan repayment period.

That’s where Prosperity Finance can help. As experienced mortgage advisers, we take a strategic and long-term approach towards finding you the best loan structure. If you’re thinking about buying an investment property or increasing your portfolio, we can help you increase your borrowing capacity by refinancing your mortgage. 

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.

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Phone: 09 930 8999 

Email: support@profin.co.nz

Other related blogs:

Why should you consider refinancing your mortgage?

Using equity to buy an investment property: what might delay your loan pre-approval?

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.