About 5 years ago, 80% of all mortgages were sitting on a floating rate. And with good reason. The interest rates were falling off a cliff. In a couple of years, fixed rates had gone from ~10% to 5% so fixing your mortgage for any number of years didn’t seem like good maths.
Nowadays, the pressure on interest rates seems to be up (or at least flat). Interest rates are still at comparatively historic lows so fixing seems like a good option but there are some questions you need to ask yourself before going ahead with fixing your mortgage.
If you have been paid a bonus or have managed to save up some money, re-fixing is a good time to pay down your mortgage. 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 all over again.
If you sell a property and the mortgage is fixed, there is a chance you will have to pay a break fee. When you fix your mortgage, you’ve promised the bank to borrow $… over … years but by selling before the maturity date, you are breaking this promise. The bank needs to repay the people who have leant them money and this can come with a fee. If you are looking to sell, consider a shorter fix period (eg; 6 months) or if it is very close, consider leaving it on floating and negotiating a discount on that rate.
In NZ, banks have 2 methods of making extra payments on a fixed loan (without incurring break fees). 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.
One bank allows you to pay up to 5% off the amount owing without break fees. So if you have a $500,000 mortgage, you could pay $25,000 per year off without penalty.
It’s important to know which method suits you and choose the bank accordingly. Paying even a little extra money off your mortgage can save you tens of thousands of dollars down the track.
At The Mortgage Lab, we walk our clients through their mortgage refix at no cost. Feel free to give your Adviser a call to discuss your options.
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