With interest rates dropping so low, you must be wondering if it is time to review your mortgages and to lock in the lowest rates in history. Or should you wait?
The smart question is not ‘should I break and refix?’ it would be better phrased as ‘what are the benefits of breaking and refixing my mortgages on lower rates considering all the costs, the incentives, and future goals I have?’.
If you have not got your break fee yet, you can use the break fee estimator on interest.co.nz or you can easily get your actual break fee from the bank (you can call or use bank mail to ask). A little known fact is they are updated daily.
For starters, let's clarify that break fees on your fixed mortgages are typically similar to the interest rate savings you would get if you break and refix your mortgage. However, there are times where arbitrage can weigh in favour of the bank or the borrower.
In late 2018 I reviewed my mortgage and took advantage of rates that had dropped lower since I bought my house. This was a time when the break fee was relatively low. My break fee was about $5,000 and my savings over the fixed terms were $8,000+ so I opted for the certainty of lower rates at the time and used some spare cash to lock in the lower rates, and chose to lower my repayments for cashflow, rather than increasing my principal repayment to pay off my mortgage faster. I am saving up for another property and prefer cash to equity.
Unfortunately, right now the break fees are less favourable to borrowers therefore breaking and refixing your mortgage may not save you money. The advertised interest rates might be enticing but do your sums carefully. I assessed my own mortgage again a week ago and the results were surprising even to me (we help 1000+ property investors with their mortgages so see a lot of different scenarios). The break fees are higher than the savings I would get from the lower rates.
Here is a current similar example:
To get your options explained to you and a break and refix restructure proposal prepared for you click here.
So what did I do? The short answer is nothing. I still have a cashback incentive clause for another 12+ months (meaning if I changed banks I would have to repay my cash incentive) and do not have any other short term mortgage, debt or property goals. If I needed to tidy up some other debts or buy another property then I might take some action or restructure the lending I have, but for now, I will wait.
There are a few circumstances when breaking your mortgage may make sense given the current rates and break fee environment. Your secondary goals will often be the driver like buying another property, restructuring some or all of your mortgages and debts, preparing for the sale of a property, de-securing assets, etc. Try not to fall into the trap of acting emotionally with your mortgages.
If you want to see borrowing options, break and refix options, or mortgage savings options, fill in the 90-second mortgage snapshot here and feel free to email me your loan details so we can build a spreadsheet together.
Andrew Malcolm is the Managing Director at iRefi.co.nz