ANALYSIS: This past month has seen mortgage interest rates jump up not once but twice, with the latest move taking 1-year rates to 4.2%. Not a particularly amazing number except for one thing: 4.2% means interest rates have officially doubled since their all-time low of 2.09% seven months ago.
With a significant amount of mortgages in New Zealand fixed on short-term rates, a lot of people are in for a shock when their rate term ends, so now more than ever, it’s important to know the basic rules of refixing your mortgage accounts. Here are my top three:
1. You can and should fix your mortgage rate earlier than the maturity date. A lot of people know this but are unaware of how long prior to the maturity date they can actually lock it in. That’s because it varies from bank to bank, anywhere between 30 days and 60 days. With interest rates on the up, it’s worth checking with your bank how far out they will allow you to lock in a new rate.
If you’d like to break your fixed rate early, most banks will allow this without penalty at the moment (but always confirm this with the bank). But remember, it might not make sense to break a rate of 2% just to lock in a new one of 4% unless you were certain rates were going to spike soon after.
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2. When an account matures (i.e. is due to be refixed), you can change your regular payments to any amount you like, as long as it’s more than the minimum required payment. There won’t be any penalties because, contrary to a popular myth, the bank doesn’t mind you paying your mortgage off faster (it actually allows them to lend out the money to other home buyers, which diversifies their portfolio), but the change must happen when the rate changes. And this is the important bit; once you lock in those higher payments, it can be difficult to reduce payments again. To reduce payments mid-term, you usually need to send in an application to the bank, something you don’t often want to do if you have had a change of circumstance that requires you to reduce your payments.
Rupert Gough: "You can and should fix your mortgage rate earlier than the maturity date." Photo / Fiona Goodall
Your increased payments are locked in for that period, whether it’s for one year or five years, but this shouldn’t put you off increasing your payments on your mortgage. The benefits of paying down your mortgage are huge over the lifetime of the mortgage, and there are ways to do this safely. Increase payments on your shorter-term accounts, not the longer-term. In other words, if you have one account fixed for one year and another for three years, increase your payments on the one year. You can review it after a year and see whether your income has changed.
There are other ways to make additional payments onto your mortgage, such using a Revolving Credit, floating or offset account. These aren’t for everyone as the money can be easy to access (and therefore easy to spend) but mean you can increase and decrease payments as you need. This type of strategy is useful for business owners, for example, who may want to pay more off their mortgage but have income that fluctuates.
3. If your property was previously mortgaged at more than 80% Loan to Value Ratio (i.e. you had less than 20% deposit/equity), you may have been paying a much higher interest rate. Some banks charge a premium, called a Low Equity Margin or LEM, on their interest rates for low equity borrowers. This can be up to 0.75% for borrowers with a 10%-15% deposit.
When a bank offers you some new interest rates, they don’t always run a valuation on your property. This means the bank may still be pricing your interest rate at a >80% LVR rate, even if your property has increased in value. If you had some capital gains in your property, which for the past year most homeowners did, and you are now borrowing less than 80% LVR, check that your bank has given you the fully discounted rates, not the LEM rates.
With rates on the rise, homeowners need to pay more attention to their accounts so they don’t end up paying more than they need to on their mortgage.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
