Break fees: repaying your mortgage early
If you are in the position to repay your mortgage early to your lender, you can. If you have a fixed interest rate that has not expired, however, you will technically be breaching the loan by repaying early.
As a result, your lender will impose a ‘break fee.’ The break fee is designed to compensate your lender for the interest payments it will miss out on when you repay your loan early. Consult with your lender for an estimated break fee.
How the break fee is calculated will always depend on your lender, the fixed interest rate and the remaining balance on your mortgage.
You should also be mindful that many lenders offer a ‘cash contribution’ payment at the start of a loan. This is a one-off payment, for example $3,000, as an acknowledgement of you choosing them as a lender – think of it as a ‘loyalty payment’ for keeping your mortgage with that lender for a certain period of time, generally three or four years.
If you repay early or refinance your mortgage (or in some cases at least half of your mortgage) this will likely trigger a ‘claw back.’ Your lender will expect you to repay some, or all, of the cash contribution. This will be outlined in your loan documentation.
Refixing mortgages: changing the interest rate of your mortgage
New Zealand’s Official Cash Rate (OCR) is noticeably dropping. As of 9 October 2024, the OCR stands at 4.75%. Most lenders are responding by lowering their mortgage interest rates.
In light of this, now may be a good time to consider refixing your mortgage interest rate with your lender – if your lender will allow you. Alternatively, you may opt for a floating or variable interest rate that goes up and down depending on the state of the financial markets, including the movement of the OCR.
The benefit of having a fixed interest rate is certainty; you will know how much your regular loan repayments will be. With a floating or variable interest rate, the amount of each repayment may vary as the OCR fluctuates. This may be preferable for some borrowers.
Alternatively, you may want to consider having your mortgage split between a fixed rate and a variable rate.
Refinancing mortgages – switching to a different lender
When refinancing your mortgage, you are essentially repaying your existing loan with your lender and taking out an entirely new loan with a different lender. Many borrowers do this to secure themselves a better deal, usually at a lower interest rate.
If you do this, it is important to know there are legal costs and potentially break fees involved in refinancing (more on break fees in column one). If you are unsure about the process and whether or not to refinance your mortgage, talk with your lender.
Also note that if the bank paid you a cash contribution at the start of your loan (more on this in column one) and you refinance, then you may be expected to repay at least some of it. This will be outlined in your loan contract.
If you are considering making changes to your mortgage and are unsure how to go about it, please contact us. We are happy to help.