Refinancing a mortgage can offer opportunities to secure better interest rates, change loan terms, consolidate debt, or support a new property ownership structure. However, when refinancing you must also take into consideration break fees, cash contribution clawbacks, and other legal requirements. This article explains how refinancing works, when it may be worthwhile, what to be aware of, and the steps involved in completing the process.
What is a refinance?
In simple terms, a mortgage refinance usually involves switching your home loan(s) to a new bank, typically under different terms. For those who are unfamiliar with these terms, ‘loan’ refers to the money being provided itself, and ‘mortgage’ is the word for the security the bank registers over your property to protect their interests. When refinancing, the new loan or loans are used to fully repay the existing loan, and in most cases, the new lender takes security over the property via a replacement mortgage.
Why should I consider refinancing and when is best to do it?
Most commonly, refinances are undertaken where a bank is offering either better terms and/or rates than your existing bank. However, refinances can also be completed in order to consolidate debt, alter a repayment structure within an existing bank, or to reflect a new ownership structure – for example where a trust or company you have set up now owns the property that is being used as security for the loan(s).
The optimal timing of a refinance is dependent on the reason for doing so. If you have a loan or loans which are on a fixed rate, then if possible it is generally best to line the timing of a refinance up with the end of your loan term, to avoid early repayment break fees. However, if the refinance is being completed as part of an ownership restructure, the refinance will need to be completed at the same time as you establish the new ownership arrangement.
Cash contribution offers
Most traditional banks (such as ANZ, BNZ and ASB or similar) are offering what is often described as a “cash contribution offer” or “cash incentive”. This refers to the bank offering you a cash-back as part of taking on new lending with them. These offers are usually for cash to the amount of 0.9% or 1% of your total lending, although this differs bank to bank.
One pitfall with these cash-back offers can be that typically, there is a clawback on the offer of a period of up to 3 years. This means that if you were to refinance to another bank or repay all of your lending within, say, 3 years of drawing down your loan(s), you would need to repay all or some of the cash contribution. Typically, the repayment structure is either on a pro-rata basis (i.e. the longer you are with the bank, the less you repay) or is split into three repayment periods (e.g. if you refinance within the first year you repay the full amount, within the second year you repay 66% and within the third year you repay 33%). If the clawback period is for 3 years or any other fixed period of time, once that period is up the cashback is no longer repayable.
The cash contribution rate can also be a factor to consider when looking at rates offered by different banks.
Where do I start?
If you are considering refinancing, the best place to start is to engage a broker who can assist with seeking out the best possible rates for you and liaising with the new bank to arrange the loan documents, or if you are already certain which bank you would like to engage, to reach out to the bank directly to ask for a personal banker to help you.
Once this is underway, the next best step is to engage a solicitor and notify them to expect documents to come from your new bank. From there, your solicitor will guide you through the rest of the process.
Our experienced Property team are able to answer any questions that you have and can assist you through the refinancing process. Contact us today for more information.
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The information contained in this outline is of a general nature, should only be used as a guide and does not amount to legal advice. It should not be used or relied upon as a substitute for detailed advice or as a basis for formulating decisions. Special considerations apply to individual fact situations. Before acting, clients should consult their Parry Field Lawyer.
