Does your mortgage structure need a once-over?

Interest rates are low right now. Ridiculously low. In fact, they recently dropped below 2.50%, which is the lowest they’ve EVER been.

These have been dropping slowly for some decades, with the fallout of COVID-19 pulling them down further.

While this is excellent news for you as a borrower, you shouldn’t just sit back and wait for the savings to come rolling in. That’s because the extent to which you benefit from these low interest rates still comes back to how your mortgage is structured. 

When was the last time you reviewed your mortgage structure?

If it’s been a year or two, you could be missing out. In particular, you’ll want to review it if:

  • Your fixed rate loan is due to expire soon.
  • Your interest rate on a floating mortgage has changed.
  • You’re about to experience life changes that will impact your income levels (eg a new job, baby on the way, retirement).  
  • You’ve received a lump sum of money that could be put to use.

Restructuring or refinancing

Before we get into the nitty gritty, it pays to understand floating and fixed rates.

Floating rates:

  • These are typically much higher than fixed-term rates. That’s because banks prefer the certainty of locking borrowers in for a fixed period of time.
  • Floating might be a good option for you if you want the flexibility of making changes without penalty (such as paying off the loan early or changing the loan term).
  • It’s easier to consolidate other, more expensive, debt into floating rates by borrowing more (I’ll explain more below on this).

Fixed rates

  • These can give you more certainty – you know exactly how much each repayment will be over the term.
  • Lenders often compete with fixed rate specials which means more competitive rates for you to choose from.
  • If market interest rates do rise, you’re locked in so this won’t affect you.

If your fixed rate home loan is due to expire, it’s definitely worth checking out your options. That could mean reviewing what’s on offer from other lenders, or looking at a new type of loan with your existing lender - eg moving all (or a portion of your loan) from floating to fixed.

If your fixed loan expires and you don’t refix, it’ll automatically roll over to whatever the floating or variable rate is for your lender.

Don’t forget, you might shop around to take advantage of competitive interest rates, but there’s also other reasons like making use of another bank’s products or services, or borrowing a larger amount.

In saying this, if your loan isn’t due to expire, you’ll want to do the math as to whether it’s worth it, because there are always break fees involved. It can be a bit tricky figuring these out, so it’s worthwhile getting a mortgage broker (like the team here at the Finance Marshall) on the case for you.

Is breaking a fixed term mortgage the answer?

Well, it really depends on what’ll cost you in bank fees. And given the current low interest rates, banks may request larger break fees than they have in the past.

So, you’ve got to weigh that up with what you’ll save on a lower interest rate.

While in many instances it’s probably not going to be worth your time and energy (and money) to break your fixed mortgage, it could be a reasonable strategy for getting interest rate certainty for a longer term at low rates.

What should I do with my savings?

If you’ve got cash to splash (or even a small amount of savings), generally speaking they’re better put towards reducing a mortgage rather than into a savings scheme. That’s because the interest you’ll save on decreasing your loan is higher than the interest you’ll earn in the bank.

The exception is KiwiSaver. I recommend continuing to contribute to this, because not only do you miss out on employer and government contributions if you stop making payments,  KiwiSaver also gives you certainty, security and peace of mind for your future.

What about debt?

If you’ve got personal loan or significant credit card debt, it’s sensible to consider consolidating these – ie pay these off and put more on your home loan.

That’s because the interest rates are pretty much always much (much, much) higher. You might have a credit card debt at a rate of 15% for example, whereas your home loan may be 2.5%. That’s a significant saving.

Will interest rates go back up?

Nobody knows for certain what will happen with interest rates. But economists, on the whole, aren’t expecting them to increase too quickly any time soon.

In fact, it’s likely they’ll drop even further and stay low over the next 2 - 3 years.

Keep this in mind when reviewing your mortgage structure and deciding whether to fix or float (or go with a combination). But as I always say, you still need to safeguard yourself by considering whether you could continue to manage your repayments if interest rates jump.

Need help?

Reviewing your loan structure takes thought, research and planning, but it can save you a whole lot of moolah in the long term. So it’s worth getting it right.

As a mortgage broker, I’m here to help ease that stress and find a solution that’ll set you up for the future.

Get in touch and let’s get you sorted.

The Finance Marshall
0508 543 627


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