In the chaos of COVID-19, there’s one thing many Kiwis have benefited from – record-low interest rates. It’s allowed thousands of people to keep their heads above water financially, as job losses and lockdowns have become the norm.
But here’s the catch – interest rates were never going to stay low forever, and they’re already on a slow and steady rise. And while an increase of 1 or 2% might not seem like a big deal, it’ll make a huge difference to your overall loan balance.
It’s a big decision for homeowners: is now the time to refinance your mortgage, and secure another term of low interest rates before they increase?
Here’s a run-down of what’s happening.
Pandemic causes house price boom
When the pandemic first hit our shores in March last year, RBNZ temporarily dropped the official cash rate (OCR) from 1.0% to 0.25%. It was a bid to support Kiwis during the unprecedented times, and relieve financial pressure. Interest rates plummeted as a result, and Kiwis enjoyed rates as low as 2%.
The same considerations haven’t been given this lockdown. Last week, the Reserve Bank announced its first cash rate increase in seven years – rising from 0.5% to 0.75% overnight. That’s still lower than it was pre-pandemic, but it’s a strong indication that a rise in interest rates is imminent.
So what does that mean if you’re a homeowner? Understandably, this news may give you sweaty palms. But if you plan carefully and think ahead, you can still make the most of low rates by refinancing your loan.
What is Mortgage refinancing?
Refinancing is when you take out another home loan to pay off your existing one. Usually, it means swapping your loan from one bank to another. As interest rates start to creep up, refinancing now means you might be able to take advantage of more favourable terms with another lender.
With the recent OCR changes, interest rates are inevitably going to go up – and soon. Although that’s predicted to happen at a slow and steady pace, any increase will mean a push on your monthly repayments – and a strain on your budget.
The good news is that interest rates are still historically low, and if you refinance now, you could snap up a good deal and secure low rates for the next few years. Here are your options in the current climate, and the pros and cons of each:
If we learnt one thing from last year’s housing predictions, it’s that things can always surprise us. If you want to take a gamble, and wait to see how things play out over the next year or so, there’s a (small) chance it might work in your favour. But it’s far more likely that you’ll end up paying substantially more over the next few years, which could see you in financial turmoil. If you’ve already stretched your budget on a home loan at the current low rates, any increase could mean you’ll be unable to make repayments.
With so much competition among lenders and an uncertain financial forecast, you’ve got some negotiating power. Banks want your business – and they’ll want to win you over with an appealing deal. As well as the obvious advantage of securing a lower interest rate, you also got a nice cashback from the new bank to bring your lending over.
Refinancing to secure a lower rate will buy you a few years to assess what happens with rates. There are other advantages to refinancing too – like securing an interest-free period with a new bank, extending the term of your loan to keep repayment affordable, or enjoying bank fees being waived – something many banks will do for new customers as long as you meet their lending criteria.
Don’t delay – refinance today
Weighing up the current financial climate, there’s no denying that refinancing to secure a new fixed-term low-interest rate is a good idea. As the financial effects of the pandemic start to sink in, it’s unlikely that rates will go down to what they were before. Our advice? Speak to your mortgage advisor about what suits your situation best – and for most, that’ll be to refinance, and use your negotiating power to secure three or four year fixed-term, locking in the current low rates.
Interested in refinancing your loan? The best place to start is to talk to an expert – we’ll help secure you the best deal, so you don’t pay more than you have to.
**These are general guidelines and are by no means a reflection of bank or lending policies