Refinancing a mortgage in New Zealand involves replacing your current home loan with a new facility, typically from a different lender, to secure lower interest rates, consolidate debt, or access equity. While switching banks can unlock significant interest savings and cash contributions, borrowers must carefully calculate break fees (ERA) and legal costs to ensure the financial move is profitable.
When is the Right Time to Switch Banks?
Deciding to refinance mortgage nz wide is rarely a decision made on impulse. It is a strategic financial move driven by market conditions and personal financial goals. In the New Zealand property market, loyalty to a single bank often yields diminishing returns. Lenders aggressively target new customers with rates and incentives that existing customers are rarely offered.
The optimal time to consider refinancing typically aligns with the end of a fixed-term period. At this juncture, you are free to move your mortgage without incurring an Early Repayment Adjustment (ERA) or break fee. However, even mid-term refinancing can be viable if interest rates have dropped significantly.
Key Triggers for Refinancing
- Interest Rate Drops: If current market rates are 1% or more lower than your fixed rate, the savings over the remaining term might outweigh the break fees.
- Debt Consolidation: Rolling high-interest credit card or personal loan debt into your mortgage at a lower home loan rate can drastically reduce total monthly outgoings.
- Renovations and Top-ups: You may need to access equity for renovations, and your current bank’s lending criteria might be too strict compared to a competitor.
- Poor Service: Sometimes, the motivation is service-based. If your current bank is slow to respond or has poor digital tools, switching can provide peace of mind.
Understanding Break Fees: The Early Repayment Adjustment (ERA)
One of the most misunderstood aspects of New Zealand banking is the break fee. Officially known as the Early Repayment Adjustment (ERA), this is a fee charged by the bank to recover the loss they incur when you break a fixed-term contract early.
When a bank lends you money at a fixed rate for, say, three years, they essentially “buy” that money from the wholesale markets at a specific wholesale interest rate. If you repay that loan early (by refinancing to another bank) and wholesale interest rates have dropped since you took out the loan, the bank is left holding expensive money that they can only re-lend at the new, lower market rate. The ERA is designed to bridge this gap.
How to Calculate Potential Break Costs
While exact calculations require proprietary bank formulas, the general rule of thumb relies on the movement of wholesale swap rates, not just the retail rates you see advertised.
The ERA Formula Concept:
(Original Wholesale Rate – Current Wholesale Rate) x Loan Balance x Remaining Time
If wholesale rates have risen since you fixed your mortgage, your break fee is often zero (or just a small administration fee). This is because the bank can re-lend your money at a higher rate, so they make a profit from your departure. However, if rates have fallen, the break fee can be substantial—sometimes running into the thousands or tens of thousands of dollars.
Before proceeding with a refinance application, always request a formal “break cost quote” from your current lender. This figure is valid usually for only one business day due to fluctuating markets.
Bank Cashback Offers: Free Money or Golden Handcuffs?
To entice you to refinance mortgage nz providers often offer a “cash contribution” or cashback. This is typically calculated as a percentage of the loan amount, usually ranging between 0.7% and 1.0% of the total mortgage.
For a $800,000 mortgage, a 1% cashback means $8,000 deposited into your account on settlement day. This cash is incredibly useful for covering legal fees (which typically cost between $900 and $1,500) and break fees.
The Clawback Period
It is critical to understand that this cash is not a gift; it is conditional. Banks attach a “clawback” clause to this cash contribution. If you switch banks again or sell your property within a specific period—usually 3 to 4 years—you will be required to repay some or all of the cash.
- Year 1: 100% repayment of cashback.
- Year 2: Often pro-rated (e.g., 75% repayment).
- Year 3: Further reduced repayment.
- Year 4: Some banks release the obligation here.
When calculating the financial viability of a switch, ensure you intend to stay with the new lender for at least the duration of the clawback period.
Using a Mortgage Broker vs. Going Direct
When looking to refinance, you have two primary channels: approaching a new bank directly or engaging a mortgage adviser (broker).
Going Direct
Going direct involves you doing the legwork. You research rates, set up appointments with bank mobile managers, and negotiate your own terms. This can be effective if you have a simple financial situation and a strong relationship with a specific bank you wish to move to.
Using a Mortgage Broker
In New Zealand, mortgage brokers are free for the borrower (they are paid a commission by the bank). Brokers can be particularly valuable during a refinance for several reasons:
- Market Comparison: They can instantly compare rates and cashback offers across all major NZ banks (ANZ, ASB, Westpac, BNZ) and second-tier lenders.
- Policy Knowledge: Different banks have different “test rates” (the rate they use to test your ability to pay). If your income is tight, a broker knows which bank is most likely to approve your application.
- Negotiation Leverage: Brokers often have access to unadvertised rates or can negotiate higher cashbacks due to the volume of business they bring to the bank.
- Structuring Advice: They can help structure the loan (e.g., splitting into different fixed terms) to minimize future interest rate risks.
The Step-by-Step Refinancing Process
Refinancing is a legal process involving discharging your old mortgage and registering a new one. Here is the standard timeline:
- Analysis: Calculate your current break fees and compare them against the savings offered by the new rate and cashback.
- Application: Submit your income evidence (payslips, bank statements) to the new lender.
- Approval: Receive a letter of offer detailing the new rates and cash contribution.
- Legal: Instruct a solicitor to handle the conveyancing. They will request a discharge from your old bank and sign loan documents for the new bank.
- Settlement: On the chosen day, the new bank pays off the old bank. The cashback is deposited, and your new payments begin.
Pros and Cons of Refinancing in NZ
Before making the leap, review this summary of the potential benefits and drawbacks.
| Pros | Cons |
|---|---|
| Lower Interest Rates: Potential to save thousands over the loan term. | Break Fees (ERA): Can be expensive if wholesale rates have dropped. |
| Cash Contribution: Lump sum cash from the bank (0.7% – 1.0%). | Legal Costs: Lawyers fees for switching usually cost $900 – $1,500. |
| Debt Consolidation: Clean up secondary debts into one payment. | Clawbacks: You are locked in for 3-4 years to keep the cashback. |
| Better Features: Access to offset accounts or revolving credit facilities. | Paperwork: Requires a full new application and credit check. |
People Also Ask
Does it cost money to refinance a mortgage in NZ?
Yes, there are costs involved. You will typically pay legal fees (conveyancing) which range from $900 to $1,500. Additionally, if you are breaking a fixed term early, you may pay an Early Repayment Adjustment (ERA). However, most banks offer a cash contribution (cashback) to new customers which often covers these costs and leaves a surplus.
Can I refinance if I am on a fixed rate?
Yes, you can refinance while on a fixed rate, but you may be charged a break fee (ERA). You need to ask your current bank for a break cost quote to determine if the savings from the new lower interest rate will outweigh the cost of breaking the contract.
How much cashback do NZ banks offer for refinancing?
NZ banks typically offer between 0.7% and 1.0% of the loan amount as a cash contribution. For example, on a $500,000 mortgage, a 1% cashback would be $5,000. This is subject to lending criteria and usually requires you to commit to the bank for 3 to 4 years.
Will refinancing hurt my credit score in NZ?
Refinancing involves a “hard” credit check by the new lender, which can temporarily dip your credit score slightly. However, this impact is usually minor and short-lived. Consistent repayments on the new mortgage will rebuild the score quickly.
What is the clawback period for bank cashbacks?
The clawback period is typically 3 to 4 years. If you discharge the mortgage (switch banks or sell the house) within this timeframe, the bank will require you to repay a portion, or all, of the cash contribution they gave you at the start.
Do I need a lawyer to refinance my mortgage?
Yes, in New Zealand, a solicitor or conveyancer is required to handle the discharge of the old mortgage from the property title and the registration of the new mortgage. They ensure the funds are transferred correctly between the banks.
