Is the end of your fixed mortgage term the best time to switch banks? What if you cannot afford the repayments?

YIJU New Zealand has recently received many enquiries from readers about rapidly rising mortgage rates. Many borrowers who fixed for a year at around 2% last year are now about to refix at rates above 5%, and say this will put enormous pressure on their living costs.

 

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Viewpoint 1: When a borrower's fixed mortgage term expires, is it worth switching lenders to try to secure a better rate?

 

According to Canstar data, only 4% of New Zealand borrowers switched mortgage lenders in the past year. One possible reason is that borrowers dismiss the idea, believing it is not worth the effort of applying to a new bank only to end up with little meaningful change.

 

Financial adviser and chartered accountant Hannah McQueen takes a different view. She strongly recommends that borrowers do their homework when their fixed mortgage rate expires, or consult a qualified mortgage broker to see whether another bank can offer a better deal, particularly when interest rates are rising. She identifies three areas borrowers can consider when assessing whether switching banks is feasible:

 

1

Financial considerations: These include securing a better interest rate or a larger cashback payment. Either could help offset rising interest rates or provide a worthwhile one-off cash payment, delivering a tangible benefit. There is no denying that new customers can usually secure a better deal more easily than existing customers.

2

Values-based considerations: Borrowers may want to borrow from a New Zealand state-owned bank, or may have become tired of their current bank's customer service.

3

Investment strategy considerations: A need to secure additional finance may prompt borrowers to switch banks.

 

 

Hannah McQueen says one key to building wealth is an investor's ability to borrow: the more they can borrow, the more wealth they can expect to create. Last week, one of her clients secured an additional NZ$250,000 in bank lending, substantially expanding the scope of their borrowing strategy.

 

Another strategic reason may be that borrowers have set their loan term too short, squeezing their cash flow and reducing their capacity for other investments. She recommends that clients extend their loan term to 25 or 30 years when switching banks. This does not mean she wants them to take longer to repay their debt. Rather, it provides greater flexibility to maximise investment in assets offering higher returns and build wealth faster.

 

Another reason to switch banks is to extend the interest-only period on an investment property mortgage. When lending for investments during economic uncertainty, banks often initially offer interest-only terms of up to 5 years. Another bank may be willing to extend that period to win a new customer. McQueen says extending the interest-only period makes considerable sense for many investors, improving cash flow and maximising the proportion eligible for tax deductions.

 

 

A further strategic reason to switch arises when borrowers use their own home as security and borrow from the same bank to purchase another property. After repaying some of the debt, investors will generally want to release their home from that security arrangement to reduce their investment risk. Refinancing with another bank may be necessary to achieve this.

 

Reasons borrowers may be reluctant to switch banks: 1: It seems too much trouble. McQueen says the switching process is now much simpler than it used to be and requires borrowers to do very little. 2: There are associated costs, although the new bank's cash incentive should help cover them. However, McQueen warns that borrowers who received a cash incentive from their bank within the past three years may have to repay part of it if they leave before the agreed period ends, under the terms of their original loan agreement.

 

Finally, McQueen advises people not to view banks as enemies, because most borrowers need banks to help them build wealth quickly. But there is a limit: when borrowers have sufficient reason to switch banks, customer loyalty becomes less important.

 

 

Viewpoint 2: What should borrowers do if, amid high interest rates, they cannot secure a stable income to keep making large mortgage repayments?

 

In reality, many borrowers will ask themselves this question during the life of their mortgage. A 30-year repayment period is a very long time. At some stage, borrowers may face an unstable income or major changes in work and personal circumstances that affect their ability to repay. The market is currently experiencing just such a shift, with interest rates rising and house prices falling.

 

Mortgage advisers at Jiayuan Finance recommend that borrowers feeling repayment pressure speak with their bank and experienced mortgage advisers such as their team. They can identify their biggest regular expenses and work with an adviser to create a more realistic household budget, adjusting spending habits to reduce outgoings. Alternatively, borrowers who have been with their bank for more than three years and do not need to repay a cash incentive could switch banks to extend their loan term and arrange a loan structure suited to their circumstances.

 

Jiayuan Finance advisers emphasise the importance of understanding a borrower's actual circumstances, allowing more time to resolve financial problems. A forced mortgagee auction is generally the last outcome a bank wants, so communication is crucial. When facing intense pressure, choosing a highly experienced mortgage specialist is also important, as they can help borrowers move towards a solution.