As the Official Cash Rate (OCR) in New Zealand continues to rise, many mortgage holders face the prospect of doubling interest rates when refinancing their home loans. However, before locking in new interest rates, it's crucial to be aware of the following five factors:
Expiry of Your Existing Fixed Rate
Knowing when your current fixed rate term ends is essential. You must decide whether to refix your home loan at a new interest rate or switch to a floating rate. If you take no action, your loan will automatically convert to a floating rate after the fixed term expires. Start reviewing your options eight weeks before the loan expiry date
Consider Your Plans and Goals
Before choosing your refix length, consider your plans and goals. Any anticipated changes in your circumstances, such as selling your home, expecting a new addition to your family, or transitioning careers, require more flexibility. In such cases, opting for a shorter fixed term may be advantageous.
Understand Different Rate Options
Differentiate between fixed and floating interest rates, and familiarise yourself with the advantages and disadvantages of each.
Floating Interest Rates:
- Offer flexibility for extra repayments.
- No break fees allow you to fix a portion of your mortgage anytime.
- Repayments fluctuate with interest rate changes, making budgeting more challenging.
- Generally higher than fixed interest rates.
Fixed Interest Rates:
- Provide certainty with set repayments for easier budgeting and financial planning.
- Fixing rates ahead of an increase can save you money.
- No benefit if interest rates decrease.
- Some lenders offer the flexibility of making extra repayments, allowing borrowers to pay off a maximum of 5% of their total loan balance without facing any penalties or fees.
Assess Your Mortgage Structure
Consider splitting your home loan to distribute risk across different terms, reducing the impact of higher mortgage repayments as interest rates rise. However, be cautious to avoid locking yourself in for an excessively long time that could prevent you from benefiting from a potential interest rate decrease. Instead, consider speaking with a financial adviser to determine the optimal home loan structure based on your short-term and long-term plans.
Explore Offers from Other Lenders
Before finalising a refix with your current lender, comparing interest rates and incentives offered by other lenders is wise. There's the option of renegotiating your fixed interest rates or exploring other refinancing options. Given the concerns arising from rising interest rates and, consequently, higher repayments among Kiwi homeowners, staying informed about changes in fixed interest rates and seeking personalised financial advice can be invaluable.
This article is for informational purposes only and should not be considered as financial advice. It is always recommended to consult with a qualified financial professional before making any financial decisions based on your individual circumstances.
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