Gosh what low interest rates we have at the moment. By far the lowest we have seen in our lifetime. Banks are run off their feet with people either buying property or refinancing and restructuring their mortgages. My mortgage advisor colleagues are saying that this is one of the busiest times they can ever recall. However, there are a couple of catches to be aware of.
Costs of refinancing
It’s too good to be true! Whilst current rates are really low, many of us are limited in how much we can take advantage of them. If your mortgages are fixed then you either have to wait until the end of your fixed terms before you can refix at lower rates, or break your fixed terms and then potentially refix. There is a cost to this and often it negates the benefit of the lower rates. This cost, called break fees, are worked out by looking at the difference between your fixed rate, current market rates and the term you have left on your fixed rate. I have some mortgages that don’t finish until next year, so I’ve got a quote from the bank to break the terms. Once I worked out the numbers I really wasn’t going to be better off. This varies from person to person so always talk to your banker or mortgage advisor. Are you better off breaking your current fixed mortgages and then refixing at lower rates? Or are you better just to wait it out?
Lack of flexibility
The challenge with fixed mortgages is just that – they are fixed. This means you do lose some flexibility so you need to think about how they will benefit you. For example, there is no point fixing for two years if you think you might sell your property within this timeframe as you will have to pay break cost. However, the risk of interest rates dropping any more are small and therefore the gap between current rates and what they could be is probably negligible.
Resting on your laurels
Interest rates are almost half of what they were just a few years ago so use them wisely. Be careful about getting too excited about how much lower your payments are and not leveraging the opportunity to pay your mortgage off faster. Can you keep your mortgage payments at the same amount they were when rates were higher? Having said that though you will need to check with your lender how best to do that. For example, with the ASB you can increase your regular payments up to double the minimum payment. With the BNZ its around four times more you can pay. Both allow you to increase and decrease your payments between the minimum and their particular maximum manually whenever it suits. It used to be that you could only pay an extra 5 -10% once a year and often there were charges associated with the payment. Getting the best interest rate is really important, however how fast you pay your mortgage off is more important. The faster you do it, the more money you save in interest. Time can be your best friend or your biggest foe.