A guide to refixing your mortgage

Is your home loan’s fixed rate going to end soon? Are you facing a higher interest rate? Here’s everything you need to know to get your mortgage sorted. 

In February 2023 Westpac estimated that the average interest rate being paid by households was about 3.8%, which is only set to increase, particularly as many Kiwis will be coming off fixed rate mortgages in the coming months and face new, higher rates.

Westpac's report also estimated that 90% of us are on fixed rate mortgages, so if you’re among this crowd then it’s worth taking a little time to consider all your options and make a plan for your mortgage. 

When should I start thinking about refixing? 

Most banks allow you to ‘lock in’ an interest rate about 60 days before your fixed rate ends, so it’s worth talking to your mortgage broker, financial adviser or bank in advance of that time (70 or 80 days out, for example). 

This is a particularly good idea if interest rates are increasing as you may be able to fix your mortgage at current rates before they go up. Some banks will allow you to roll over your mortgage via their app if you’re not changing its structure. 

Where are interest rates headed?

Without a crystal ball no one can know exactly where interest rates are headed. The best we can do is listen to the experts:

• The Reserve Bank of New Zealand increased the OCR to 4.75% in February 2023 in an attempt to manage inflation, and the next OCR announcement is due in April 2023. 
• ASB’s December 2022 economic forecast predicted interest rates to increase over the first half of this year before starting to decrease in 2024. 
• BNZ’s forecast is similar, expecting mortgage rates to continue to rise for a little longer. 

However, no one can really predict exactly what will happen. So it's always best to prepare for the unexpected just in case. 

How should I structure my mortgage? 

When you talk to your financial adviser, mortgage broker or bank, they'll help you structure your mortgage with your personal circumstances, future goals and the interest rate environment in mind. They'll also help you work out which options are preferable for your financial situation.

Here are a few of the options they might discuss with you:

• Fixed rates: a fixed interest rate can be locked in at current market levels, usually for up to five years. Longer fixed terms give more certainty but are usually higher, shorter fixed terms are usually lower but give less certainty (this is not the case right now though). At the moment, some banks' 2-5 year rates are actually lower than one year rates. 
• Variable rates: variable rates go up and down with the market. They’re generally higher than fixed rates but they may offer more flexibility to make extra repayments or repay your loan, for example after a property sale without penalties. 
• Split rates: a loan with split rates is just what it sounds like. You could have a portion fixed and a portion variable to lock in a lower rate and have some certainty but allow you to make extra repayments. Or you could try interest rate averaging - splitting your loan between different fixed rates (for example, you could split your loan into thirds with a one year, two year and three year fixed rate). This helps you avoid interest rate shocks, which is when your entire loan rolls off a fixed term onto a higher rate and your repayments increase. 
• Interest only: an interest only loan could help you reduce your payments if you’re struggling financially, however owner occupiers may prefer not to go with this option as it won’t be reducing the loan principal. 
• Revolving credit: a revolving credit turns a portion of your mortgage into something like a big credit card. You can make extra repayments up to a certain limit, and will still be able to access those funds if you need to. Any repayments into your revolving credit account will reduce the interest you pay.
• Offset accounts: offset accounts are savings accounts that are linked to your mortgage. You no longer receive interest on your savings account/s but only pay interest on your mortgage amount less whatever amount is in your offset account. 

There are several other mortgage features and ways to structure your home loan. Before you lock anything in it’s always best to get financial advice from an expert that you can trust - whether that’s your bank or lender, mortgage broker or financial adviser.

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