When should you NOT refinance your mortgage?
When conditions are right, refinancing your mortgage can help you secure better interest rates, reduce the term of your loan and strengthen your overall financial standing. However, while this might sound like a pretty attractive option, refinancing is not always the way to go.
Here are four situations where you should never refinance your mortgage:
- You’re planning on moving soon
When talking about refinancing, your break even point is the amount of time it will take you to recoup the cost of break fees (penalties imposed by your bank for exiting your mortgage early). Let’s say, for instance, your prospective home loan will save you $100 a month but you have to pay a break fee of $5,000. That means it will take you 50 months to reach your break even point. Therefore, if you intend on selling up before that date, it doesn’t make any sense to refinance your home.
- Interest rates are on the rise
If you’re considering refinancing your fixed rate mortgage to a variable rate home loan in order to take advantage of favourable market conditions, it’s important to do so with a long-term mentality in mind. Why? Well, should rates increase in the future, your payments will go up, and you may never be able to recover the costs of refinancing! Of course, accurately predicting which way the market will swing is another topic altogether…
- Your credit score has dropped
Banks take your credit score (essentially a rating of your financial trustworthiness) into consideration when calculating home loan rates in New Zealand. If you’ve recently lost your job, accrued bad debt or made other financial slip-ups that impact your credit score, you may be limited to unfavourable mortgage offers that would make refinancing an uneconomic choice.
Refinancing can help you save big on your mortgage, but it’s certainly not a miracle solution. Think carefully about the pros and cons in context of the economic climate (both current and future) before committing to anything.
If you want to have a no-obligation chat with an expert, get in touch with one of our partnered mortgage advisors.
Happy home buying,
The PocketWise team