How to Refinance a Mortgage

If you want to change the terms of your mortgage, either to secure a better deal, borrow more money or because your personal circumstances have changed, you’ll need to refinance your mortgage. Canstar explains all you need to know about how to refinance a mortgage.

What is refinancing a mortgage?

Refinancing a mortgage means replacing a current home loan with a new one. Many people refinance to secure a lower interest rate, or to access the equity in their home to borrow more money.

What reasons are there for refinancing a mortgage?

There are several reasons why someone might choose to refinance their mortgage:

1. Lower interest rate

One of the most common reasons to refinance is to secure a lower interest rate. If interest rates have decreased since you took out your original mortgage, refinancing could help you save money on interest payments over the life of the loan.

2. Reduced monthly payments

Refinancing to a loan with a lower interest rate, or extending a loan term, can lower monthly mortgage payments, which can help during periods of financial stress.

3. Shortening the loan term

Some homeowners refinance to switch from a longer-term mortgage (such as a 30-year loan) to a shorter-term mortgage (such as a 20-year loan) in order to pay off their home faster and save on interest charges.

4. Cash-out refinance

This option allows homeowners to tap into their home equity by refinancing for an amount greater than the remaining balance of their mortgage. The extra money can be used for home improvements, debt consolidation, investments, or other financial needs.

→Related article: What is Debt Consolidation?

5. Divorce or legal situation

In the case of divorce or other legal matters involving property ownership, refinancing may be necessary to remove one spouse’s name from the mortgage or to adjust the terms of the loan.

→Related article: What Happens to Your Mortgage in a Divorce?

Compare with Canstar for the Lowest Mortgage Rates

One of the best places to start your hunt for the lowest mortgage rate in New Zealand is Canstar’s home loan database, ratings and awards. Not only can you compare 245 different mortgage products from 11 lenders, you can discover which loans and lenders earn Canstar’s top awards for value and service, as judged by our expert research panel.

For while the lowest interest rates are important. There is more to a mortgage than just interest charges. When Canstar compares and rates mortgages and mortgage lenders, our expert researchers look at each home loan and awards points for the array of features it offers and its comparative price, which includes rates and fees.

The best products then receive our 5-Star Ratings for Outstanding Value. We place a lot of importance on our ratings, which is why our main comparison tables are sorted initially by Star Rating, highest to lowest. However, if you want to compare by lowest rates instead, you can do that, too.

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What to do before refinancing

Before you jump right in to a new mortgage, there are a few things to be aware of:

1. Shop around for the best deal

It’s up to you to explore the home loan products and interest rates available in the market, and to actively pursue a better deal by shopping around. A great place to start is by comparing home loans with Canstar’s comparison tool.

2. Find out about any break fees

If you’re on a fixed-term mortgage and are thinking about refinancing, it’s essential to inquire with your bank about any associated break fees. These fees usually cover any interest charges the bank could miss out on, and can amount to thousands of dollars.

However, it’s worth noting that during a period of rising interest rates, if you’re refinancing with the same mortgage provider, they are often happy to wave bank fees if you’re switching to a mortgage with a higher rate of interest.

When refinancing, it’s important to comprehend all associated expenses thoroughly. These could encompass reimbursing any cash incentives received or covering exit and discharge fees.

→Related article: Squirrel: Fixing your Mortgage Long-Term? Beware of the Break Fee!

3. Work out if refinancing is the best option

Low interest rates look temping, but beware, interest rates are subject to change. They may fluctuate in the coming years, possibly rising again, which could diminish the savings gained from refinancing when compared to the associated fees. Predicting the future is challenging, so ensure that the decision to refinance is genuinely worthwhile.

Canstar’s Mortgage Calculator can help you figure how much you’ll save over the life of a loan. You can also assess how much faster you could repay your loan by maintaining the same repayments or increasing them while benefiting from the lower rate.

4. Enlist the help of your bank or mortgage lender

Your bank can assist you in assessing whether refinancing aligns with your needs by providing you with the necessary figures. However, if you’re uncertain about remaining with your current lender, consider consulting with a mortgage broker. They can explore various options on your behalf and assist you in finding the most suitable loan for your requirements.

While many banks provide incentives to encourage you to choose their loans, there are usually expenses associated with switching lenders. These may include solicitor fees for altering the mortgage, undergoing new valuations, and application fees.

How to refinance a mortgage

Here’s how refinancing a mortgage works:

1. Application process

Just like when you applied for your original mortgage, you’ll need to go through an application process with a lender. This involves submitting financial documents, undergoing a credit check, and providing information about your current mortgage.

2. Home appraisal

The lender will likely require a new appraisal of your home to determine its current value. This is important for calculating the amount of equity you have in the property and determining the terms of the new loan.

3. Reviewing offers

Once your application is processed and your home is appraised, you’ll receive offers from lenders detailing the terms of the new mortgage, including interest rates, loan terms, and closing costs.

4. Choosing a loan

You’ll review the offers and choose the one that best fits your needs. This might involve selecting a loan with a lower interest rate, a different term length (e.g., switching from a 30-year to a 15-year mortgage), or opting for a cash-out refinance if you want to access your home’s equity.

5. Closing process

If you accept an offer, you’ll go through a closing process similar to when you initially purchased your home. This involves signing paperwork, paying closing costs, and finalising the loan agreement.

6. Paying off the old mortgage

With the new loan in place, the proceeds are used to pay off your existing mortgage. Any remaining funds from a cash-out refinance are typically provided to you as a lump sum.

7. Start making payments on the new loan

Once the refinancing process is complete, you’ll begin making monthly payments on the new mortgage according to the terms of the loan.

Refinancing can offer several potential benefits, such as lower monthly payments, a lower interest rate, access to cash, or a shorter loan term. However, it’s important to carefully consider the costs associated with refinancing, including closing costs, appraisal fees, and any prepayment penalties on your existing mortgage. Additionally, refinancing may not be beneficial for everyone, so it’s important to evaluate your individual financial situation and goals before proceeding.

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About the author of this page

This report was written by Canstar Content Producer, Caitlin Bingham. Caitlin is an experienced writer whose passion for creativity led her to study communication and journalism. She began her career freelancing as a content writer, before joining the Canstar team.

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