Mortgage renewal? What you need to know to avoid a costly mistake

Pay more, pay faster

Pitchers said the smart option with any mortgage is to pay what you can afford, up to the maximum additional repayment limit set by your lender.

“If you can afford to pay more, do so because it will save you money on your mortgage in the long run,” he said.

“Most banks allow you to make additional payments up to your limit, which can save you tens of thousands of dollars and years on your mortgage.

“It’s a simple equation: the higher your payments, the faster you’ll pay off your mortgage debt.”

Pitchers said that looking at a $400,000 mortgage over 30 years with a 6% fixed rate, by paying an extra $100 per month you could shave three years off your mortgage term and save $55,759 in interest payments .

“But if you don’t use a variable rate, most lenders place limits on additional payments on fixed rates, but significant savings can be achieved over the life of the loan.”

Missing a deadline – is it worth it?

Because banks borrow money to lend to customers, they charge a penalty—or fee—to compensate for the financial loss incurred if you pay off your loan balance before the due date by switching to another bank.

This can mean hefty interruption fees for clients.

“If you’re going to break your mortgage, your lender will want to recoup all of their expenses associated with that mortgage—basically, the interest payments that you would have made but that they’ll miss out on,” Pitchers said.

“If you’re halfway through getting a longer-term fixed-term mortgage, the break fees can be significant, tens of thousands of dollars.”

Pitchers warned that costs to consider are not just early termination fees, but also things like revaluing your home for a new lender and potentially clawing back any cashbacks you may have received from the old lender.

“You’ll have to make sure that any savings you’re likely to make are worth the cost,” he said.

Nathan Miglani, managing director and senior adviser at NZ Mortgages, said about 40-50% of their clients wanted to go broke.

“As long as there is a financial benefit for people, it is always worth refinancing,” Miglani said.

“(Most) clients have been on one-year contracts in the last couple of years, so I don’t really see much of an issue. In any case, everyone will be ready for an extension in the next few months.”

Getting a Better Deal

Often the best way to close a deal is to simply ask.

“Banks don’t publish their best rates on their websites, so you’ll have to contact lenders directly to see what kind of deal they can offer you,” Pitchers said.

“Or, if you prefer, talk to a broker who will negotiate for you.”

Last month, OneRoof reported that ANZ had cut its annual discretionary non-advertised mortgage rate to 5.59%, 60 basis points (bps) below advertised special (6.19%) and standard (6.79%) rates for their website.

The Commerce Commission’s final report on retail banking, published in August, said discretionary discounting was a common feature of competition for mortgages in New Zealand.

Pitchers said people should also be aware that many banks offer cash-back incentives.

“And not just for first-time homebuyers or new clients. Even if you’re already a customer, it’s worth asking – you can get up to 1% sweetener.”

How low can you go

Regardless of whether the Reserve Bank reduces the OCR by 25, 50 or 75 bps. on Wednesday, variable or short-term fixed mortgage rates are likely to remain popular while interest rates continue to decline.

“If we’re lucky, we’ll see 4.99%, 4.89% maybe two or three years before Christmas,” Miglani said.

“If we are unlucky before Christmas, we are sure to see growth of 4.99% over two to three years by February next year.

“50 basis points is a lot. Even if banks do move 30-40 basis points, it could make a significant difference.”

ASB and BNZ currently offer the lowest standard two-year fixed rates at 5.69%.

Westpac is offering a special rate of 5.65% for two years.

Cameron Smith is a journalist from Auckland. Herald business team. He joined Herald in 2015 and covered business and sports. He covers topics such as retail, small business, jobs and macroeconomics.