As interest rates continue to rise, we are often asked by clients if they should consider breaking and re-fixing their existing interest rate prior to their scheduled rollover date.
This is a good question and really depends on a combination of your overall risk tolerance and your ability to service lending at a higher interest rate in the future if required.
We have seen 12 month fixed rates rise from lows of 2.19% to 6.49% in less than 2 years – which is certainly unprecedented in the NZ market. It is hard to imagine now that the 60 month fixed rate of 2.99% available not long ago wasn’t overly popular!
Banks are now paying healthy cash contributions of up to 1% of the loan amount, and are tending to price new business favourably giving many borrowers the incentive to refinance as banks compete for market share in a slowing market.
When you refinance you also have the option to adjust the loan term and structure to suit your goals and cashflow requirements. You can utilise innovative products like revolving credit or offset facilities to store that cash contribution and any other cash you may have on hand. This minimises interest payable and provides you with enhanced flexibility if you need access to these funds in the future. Offsetting a mortgage rate of 6% also beats any savings or term deposit product available in the market (and it’s a ‘net return’ vs savings accounts returns that are taxed).
The Bank assessment process has improved in recent months with most lenders responding inside 5 business days. Once a loan is approved the pricing can be locked in through loan documentation. Most banks allow you to execute those documents within 60 days, meaning you can reap maximum benefit from the low interest rate you possess for a further two months post documentation and pull the trigger when you’re ready (e.g. on rate expiry or sooner if desired). This hedges your position against further rises to interest rates while keeping your current rate in-tact as long as possible – the best of both worlds.
If you have multiple properties, another consideration to keep in mind is avoiding the dreaded ‘one bank trap’ and splitting your portfolio up between two or more banks (situation dependant) to ensure any one bank does not hold too many cards if you want to sell or make changes in the future. As advisers we specialise in this sort of transaction and ensure you are well informed and can consider all options on the table.
Speak with your Advice Knight adviser today to see if a similar solution may be the right choice for you.
Anthony Sage is an Advice Knight Adviser; you can reach him by email anthony@adviceknight.co.nz or phone 022 651 7802.