Refinancing your mortgage doesn't always mean sticking with the same type of loan you've always had. In fact, one of the most powerful moves you can make is refinancing to a different loan type that aligns with your current financial situation and goals.
Whether you're looking to reduce repayments, access equity, or consolidate debt, changing your loan structure during a refinance can open up opportunities you might not have considered. Let's explore how switching loan types during refinancing works and what options might suit you.
Understanding Your Current Loan Type
Before you can refinance to a different loan type, it's worth understanding what you currently have. Most New Zealand homeowners hold one of these common mortgage structures:
- Fixed rate mortgages: Your interest rate stays the same for a set period (commonly 1 year fixed, 2 year fixed, or longer terms)
- Floating rate mortgages: Your interest rate can change at any time based on market conditions
- Split loans: Part of your loan on a fixed rate, part on a floating rate
- Interest-only loans: You pay only the interest for a set period, with no principal reduction
- Principal and interest loans: You pay both the loan amount and interest with each payment
Many people set up their mortgage years ago and simply re-fix at each fixed rate expiry without considering whether their current loan structure still serves them.
Why Switch Loan Types?
There are several compelling reasons to refinance to a different loan type:
Cash Flow Management: Switching from principal and interest to interest-only payments can reduce your monthly outgoings, freeing up cash for other investments or business opportunities. This is particularly relevant for property investors.
Interest Savings: Moving from a floating rate to a fixed rate when rates are favourable can help you save on interest over the long term. Conversely, switching to floating might suit you if you're planning to make large extra payments or sell soon.
Debt Consolidation: Refinancing from a standard home loan to one that allows you to consolidate debt can bring all your borrowings under one roof, often at a lower rate than credit cards or personal loans.
Accessing Growth: If your property value has increased, refinancing to a loan that includes an equity release or top up can provide funds for renovations, investments, or other major expenses.
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Popular Loan Type Switches
Let's look at some common scenarios where Kiwis refinance to different loan types:
From Fixed to Floating
If you're planning to sell your property soon or want the flexibility to make unlimited extra payments without penalties, switching to a floating rate might make sense. While floating rates are typically higher than fixed rates, they come without break fees if you pay off the loan early or decide to switch banks.
From Floating to Fixed
When you want certainty in your budgeting or believe interest rates might rise, locking in a fixed rate provides peace of mind. Many people use their fixed rate expiry as a trigger point for a mortgage review to compare rates across lenders and secure a competitive rate.
From Principal and Interest to Interest-Only
Property investors often make this switch to improve cash flow. By temporarily moving to interest-only repayments, you reduce your monthly costs. However, remember that you won't be paying down your loan balance during this period.
From Interest-Only to Principal and Interest
As you approach retirement or want to accelerate your mortgage payoff, switching from interest-only to principal and interest ensures you're making progress on reducing your debt.
What to Consider Before Switching
Changing loan types during a refinance isn't a decision to rush into. Here are key factors to weigh up:
Break Fees: If you're currently on a fixed rate and want to refinance before your term ends, you'll likely face early repayment costs. Sometimes a better deal with another lender or a more suitable loan type can offset these costs, but you'll need to run the numbers with a refinance calculator or mortgage adviser.
Refinance Costs: Switching lenders typically involves legal fees and sometimes valuation costs. Some banks offer cashback or refinance deals that can cover these expenses, but factor them into your decision.
Long-Term Goals: Your loan type should match your financial objectives. Having a mortgage health check with a refinance specialist can help you see the bigger picture and choose the right structure.
Lending Criteria: Different loan types come with different approval requirements. Interest-only loans, for instance, often require larger deposits or equity positions.
The Switch Process
When you're ready to refinance to a different loan type, here's what the refinance process typically looks like:
- Assessment: Review your current situation and goals. How much can you save? What do you want to achieve?
- Research: Compare rates and loan products across different lenders. Look at special rates, cashback offers, and features.
- Application: Submit your refinance approval application with your chosen lender or through a mortgage adviser.
- Valuation: Your property will likely need a current valuation.
- Legal Work: Your solicitor will handle the change lender documentation and settlement.
- Settlement: Your new loan is established and your old one is paid off.
Working with a mortgage adviser who specialises in refinancing can streamline this process and help you avoid costly mistakes.
Making the Numbers Work
Before committing to a loan type switch, crunch the numbers thoroughly. Consider:
- How much you'll reduce repayments (if that's your goal)
- Total interest savings over the life of the loan
- Any costs involved in the switch
- How long you plan to keep the property
- Your ability to make extra payments
A loan review isn't just about finding a lower rate - it's about finding the right loan structure for your circumstances right now.
When to Time Your Switch
The ideal time to refinance to a different loan type is often:
- When your fixed term is ending (avoiding break fees)
- When your financial situation has changed significantly
- When you've built up substantial equity in your property
- When market rates are particularly favourable
- When you're ready to access equity for a specific purpose
Don't wait for your bank to contact you about your fixed rate expiry. Be proactive with a mortgage review at least three months before your term ends.
Finding the Right Structure
Every homeowner's situation is unique. What works for your neighbour might not suit your goals. Whether you're looking to access equity, reduce your monthly commitments, or consolidate debt, there's likely a loan structure that fits.
The key is understanding your options and having someone in your corner who can explain the pros and cons of each approach. A specialist can help you navigate different loan types, compare offers, and find solutions you might not have known existed.
Refinancing to a different loan type can be a powerful financial move, but it requires careful planning and expert guidance. Don't just accept what you've always had - explore whether there's a loan structure that could serve you even more effectively.
Ready to explore whether a different loan type could work for you? Call one of our team or book an appointment at a time that works for you. We'll help you review your current situation, explain your options, and find a solution that aligns with your goals.