Fixing or Refixing Your Mortgage: Three Questions to Ask

Fixing/refixing your mortgage isn’t as exciting as buying a new house. Or for that matter, as exciting as getting your favourite brand of laundry detergent. But it is an important opportunity to clarify your financial situation and get your mortgage setup in the best way for you. This article talks you through what to consider and will help inform your conversations with your mortgage broker.

What is the forecast looking like for fixed interest rates?

What does the market think interest rates will do? Perhaps more importantly, what is your risk tolerance and how financially secure are you? Locking in rates for a long time mitigates the risk of higher interest rates but also stops you benefiting if rates go lower. You may prefer to lock in a rate now and have higher financial certainty for the next few years or so. Or perhaps you’re happy to take the chance with a shorter term fixed period. Or even go with the floating rate on the bet that rates will keep going down. It’s about finding the balance that is right for you. 

When do your other accounts become due for refixing? 

If you have one mortgage account maturing in a year’s time, you generally wouldn’t fix another account to mature at the same time. This is to mitigate the impact of payment shock if interest rates were to drastically increase a year from now. Instead look at fixing for a longer or shorter period to space out your accounts’ maturity cycles.

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What is life looking like in the short term?

It’s a worthwhile exercise to sit down and forecast your next 1-2 years. Run through your best and worst case scenarios and how they may affect your mortgage. 

Common things to consider are:

Are you likely to sell your house any time soon?

If you sell your house during a fixed interest rate period you could have to pay a break fee to the bank. This is because  when you fix a rate with the bank you are promising to pay them interest over the period of the fixed rate. The break fee buys yourself out of that obligation. 

So keep break costs in mind when deciding whether to fix an interest rate and for how long. Note that leaving your mortgage on a floating rate means paying a higher interest rates; you’d want to be pretty sure you were going to put your house on the market in the next three months. Otherwise you may want to consider refixing for six months. If your plans were to change while on a floating rate and you were no longer looking to sell make sure to refix your rate then.

If you want to know what your break fees would be you can ask the bank, don’t worry they won’t hold it against you! Note however that the quote for break fees is valid for one day only. This is because the pricing calculations the banks use are based on current numbers so the fee changes on a daily basis. Use the quote to estimate the approximate fees but don’t expect them to be exact.

What does my income look like over the period I am looking to fix/refix? 

Some things to consider:

  • Uncertain job security. Ideally you would pay down your mortgage as much as you can. However, if your income is looking uncertain you may decide to commit to lock in lower repayments. Revolving credit accounts can be a good option, where you pay down your mortgage but the money is still available should you need it. In extreme circumstances (illness, redundancy etc) you may ask to pay the interest only for a short time. A combination of interest only and a revolving credit account means you can pay your mortgage down while still having access to the most amount of cash possible if needed.
  • Savings in the bank. Refixing is the time to look at doing a lump sum payment if you have any spare savings. There won’t be any break fees and the money will not be available to tempt you to spend. If you use a revolving credit account and have paid this down, you can pull the money out of there, pay down your mortgage and begin to pay down the revolving credit account all over again. 
  • Possible windfalls. Maybe you are expecting a bonus or commission payment or the proceeds of an estate sale. In this case ask your mortgage broker whether your bank allows one off payments with no penalties. If they don't, discuss with your broker whether it is worth moving to a bank that does.
  • Possible increase in income. If you’re expecting a pay rise, talk to your mortgage broker about whether your bank allows an increase in regular payments. Most allow you to increase the payments by up to 20%. So if you are paying $500 per week, then you can increase it to $600 per week with no penalty. The only caveat is that you cannot reduce those payments again until the end of the fixed rate.
  • Planning a family? What will this mean for the household income? Make sure any payments you fix in now will still be manageable if in 9 or so months your household income is reduced. Sorted.org.nz has some good tips and a budget tool to help you work out your projected income and costs.

At The Mortgage Lab, we walk our clients through structuring or refixing their mortgage at no cost. Give one of our brokers a call to discuss your options.

Our online course "How To Buy Your First Home" walks you through each step to present yourself to the bank as the perfect first-home buyer.

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