Refixing Early to Beat Inflation

With usually negligible break fees, should you take advantage of interest rates currently lower than inflation
April 18, 2022
Refixing Early to Beat Inflation

Here we look at how the current inflation levels, not seen in New Zealand in decades, are impacting interest rates far more quickly and higher than were expected by most economists following the COVID pandemic.

Many people have fixed in the interest rates at historically record low levels for the short to medium term.
As a result, many mortgages are now, or soon due to, roll over onto notably higher interest rates.

Many people are concerned that, while their currently lower interest rates will help with their money cash flow for now until they expire, when it comes time to refix the available rates will be significantly higher.
However, many have been reluctant to break and refix for a longer term (and lock in moderately low interest rates still on offer) as they are worried that they would have significant break fees or penalties if they break their fixed loans early.

when refixing to a higher rate, often there is negligible or no break fees

While incurring break fees was previously common when interest rates were declining, now that interest rates are increasing often there is negligible or no break fees for breaking from a lower interest rate mortgage then reflexing to a higher rate.

The interest rates on offer right now, which are currently still significantly lower than inflation levels. Based on forecasts of the OCR, the interest rates are expected to rise again for the future or the foreseeable future.
An early refix for a longer term can provide some medium-term assurance of a more affordable rate, but the trade-off is the loss of the low interest rate and comparatively reduced payments that you get as are sult

It is expected that interest rates will continue to rise for some time.

Hence, even the higher or notably higher rates on offer right now could be significantly lower than what we will see in another six to 12 months’ time or more.

That's certainly a guessing game and a bit of crystal ball gazing required to decide whether the benefits of breaking now or prior to fixed loan rollover dates outweigh the initial additional cost or the opportunity cost of retaining the lower interest rates until the loan is due to rollover.

Your financial advisor can, with your permission, request from the bank a confirmation whether any break fee would apply.
They can confirm other details such as loan amounts repayments, fixed interest rates or floating discounts currently applied. They can also negotiate new interest rates to be fixed in now and these are often valid for a few days or more to consider options.

Your adviser can work around your financial goals and what you would like to achieve

They can work with you around your goals and what you would like to achieve – whether that is trying to minimize interest costs and repayments in the short to medium term or potentially higher repayments with the benefit of extra certainty of interest rates not changing for medium to longer term if this suits your personal situation.

Most advisors should be able to provide this advice without charge and many are completely independent of specific banks who may have their own internal targets and priorities.

Another consideration to make is whether any cash back has been received and whether the client is within the clawback timeframe of this and if this will impact on the action.
In most cases where a client breaks and refixes with the same bank there should be no clawback fee on cash backs either.

There are some situations where your advisor can advise you whether this might impact you.
Examples include making large lump sum payments and/or restructuring mortgages to suit changing goals.

Another consideration while deciding whether to break or refix now or in the near future is whether to remain with the same bank. It may be worth considering a new application at the same time as looking to refix or restructure. Especially if you've had your mortgage with the same bank for a long time.
Examples include seeking additional funds such as a top up to do renovations, the opportunity to buy or upgrade a vehicle or planing for future investment.
An adviser may be able to also keep options open with your current bank and of any other banks to compare which outcome would be financially more to your advantage.


We can help you take advantage of heavily discounted rates, strong cashbacks and other benefits

Banks right now are happy to lend to clients with good equity and incomes and some are offering incentives to move their mortgages such as heavily discounted interest rates, strong cashbacks, reduced or waived fees, and other conveniences such as not having to move your day to day banking.

If moving your mortgage to another bank, you’ll need to also move at least one security property and respective lending amount(s) associated with this.  If there are multiple loans fixed in for different timeframes, the benefits of moving the mortgage(s) would differ to if your mortgages are due to all rollover in the near future.

If changing banks, some additional costs can apply on top of break fees if applicable, such as discharge fees (typically $100 or less per property) and a solicitor will need to be involved in the refinance or security registration which typically can cost around $1000 or more. The property insurance will also need to note the correct interest party (bank mortgage).

As the market and inflation continues to change, being proactive is prudent. Rates on offer are notably lower than current inflation, with usually negligible break fees.

Reach out to your mortgage broker to review your mortgage/structure and assess whether it is set up to suit your goals under the current fast-changing conditions.