Rates slashed: What you need to know about breaking your mortgage

There was a time when most people knew their bank manager and would be able to greet them on the street and enquire about their health and family.

But these days, people's interactions with their bank are a lot more transactional - especially when it comes to choosing a mortgage. Some of this is down to the sheer number of mortgages that are processed in a month and that mortgage-approvals are now a tick-box process rather than based on a gut decision. This can be frustrating for clients that remember the days when a long-term relationship with the bank tipped the odds in your favour.

The banks have further encouraged changing institutions by offering, sometimes outrageous, cash contributions for coming over to them. I have seen cash contributions of more than $15,000 to bring a mortgage to a new lender. This far exceeds the solicitor costs of changing the property title and was a compelling reason for clients to consider changing banks, particularly if they view their current banking relationship as purely transactional.

But in the past two months the amount of cash contributions has significantly reduced. At most banks, a mortgage of $400,000 will only receive enough cash contribution from the new bank to cover the conveyancing costs.

But there are still a number of reasons you might consider changing banks. Banks offer a selection of mortgage accounts with different functions - revolving credit accounts, offset accounts, floating accounts, and fixed rate accounts you can increase payments on without penalty, or make a bulk payment on without penalty.

Your bank might refuse to extend the interest only period on a mortgage when asking for a perfectly reasonable reason (such as for tax efficiency on investment properties). Perhaps the service you have had, either at the branch or over the phone has just been sub-par.

With rates of under 3 percent, well over 80 percent of New Zealand mortgages are currently on a fixed rate so moving bank has to be timed correctly to avoid break fees.

The best time to review your situation is around 60 days before your fixed rate is due. You can talk to a broker, or shop around the banks yourself, and find which bank best suits you. You’ll have plenty of time to make the application and organise the documents to be sent to your lawyer. If you’ve timed it correctly, you’ll end up changing banks at the same time as your fixed rate matures and there will be no break fees.

If you have multiple fixed rate accounts, you may need to accept some break costs whenever you change banks. You will also need to pay back any cash contribution your current bank has given you if that was received within two to four years (different banks have different policies on this). All of this will weigh into your decision whether moving banks will put you into a better financial position than with your current bank.

Here are some things to do if you’re looking to change banks:

- Consider what the issue with your current bank is and if another bank can and will make you a significantly better offer or have a better product.

- As you would with any business, give your current bank an opportunity to correct their mistakes. If it was bad service, ask for a new manager. If the accounts you have setup - e.g. a revolving credit account - isn’t achieving what you want, see if they have an alternative account that better suits your needs.

- Find out what it will cost to leave your bank including break fees and repayment of cash contributions investigate what other banks can offer or talk to a broker about your needs

- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer