Your guide to refixing your mortgage
Our top refixing and refinancing tips that could save you thousands.
Depending on how you look at it, when it comes time to refix your mortgage every year or two, it’s either a pesky bit of life admin or it’s a golden opportunity.
We’re definitely in the second camp.
Done right, mortgage rollovers should be a chance to step back and assess the bigger picture around your mortgage and whether it’s working for you.
Is the way you’ve got it structured quite right? What about your payments? And could you be doing things differently to save money and stress?
In this guide, we lay out all our best refixing, refinancing and restructuring hacks to help you master your mortgage – and likely save yourself thousands.
Tip 1: Where we are in the interest rate cycle actually matters
One of the questions we get most is...what’s the “best” term to fix for?
We wish it was that simple. But the truth is there’s no single best strategy when it comes to fixing (or refixing) your mortgage – and that’s because where we’re at in the interest rate cycle makes a real difference.
At the top of the cycle, like where we are now, interest rates are high and borrowers will be feeling really squeezed. House prices are probably falling too, which only creates more stress, and job security might also be a bit uncertain as the country heads into recession. It’s a nasty cocktail.
In that scenario it can be tempting to fix longer-term, because those rates might be slightly lower than shorter-term rates. But there’s a bunch of potentially very costly risks with that approach if and when rates start falling again. We’ll get to those shortly.
If you can time the bottom of the interest rate cycle (easier said than done we’re afraid) that’s when you’d want to fix longer-term. But the window of opportunity is often fleeting. Think back to mid-2021, when mortgage rates were at record lows...until they weren’t. And the pace at which rates increased then caught everyone by surprise. Us included.
The “best” refix strategy will change depending on where rates are, and where they’re headed.
There’s no way of predicting exactly what interest rates will do next (what we wouldn’t give to have that superpower), but your adviser will be able give you a broad indication of what the markets are expecting will happen.
We’ll also be able to talk you through the risks and any other considerations you’ll need to be aware of before locking anything in.
Tip 2: That said, short-term fixed rates are almost always better
Back in his banking days, Squirrel founder JB crunched the numbers to try and figure out what the “best” strategy might be – using 30 years of interest rate data.
The verdict? Fixing for 1 year is pretty much always your best bet.
Mortgage rates are influenced by the financial markets, but the exact forces at play change depending on the term you’re looking at.
Short-term rates are mainly driven by the banks and what they’re expecting the Reserve Bank to do with the Official Cash Rate. The factors driving long-term fixed rates are more complex – and can include things happening halfway round the world (like US interest rates).
You’ll usually get the best deal on whatever rate is making the banks the smallest margin. Because shorter-term rates are such a key battleground for the banks when it comes to winning customers, they usually take a smaller margin on 1- and 2-year term rates. Less so for those longer terms of 3 years plus.
As we’ve touched on in tip 1, whether we’re at the top or the bottom of the interest rate cycle makes a big difference, but as a general rule...
If you can afford your mortgage and are not concerned about higher rates, then fix for shorter-terms up to two years.
Tip 3: Take advantage of special offers for refinancing where you can. It’ll be worth the effort.
Interest rate specials used to be the way banks won new customers. Lately they’ve moved away from that and started to offer “cashbacks” on refinances instead.
A cashback is pretty much exactly what it sounds like: a cash payment you get when you settle your new loan with a bank. The amount you get varies from 0.60% to 1.00% of the total loan value.
So if you’re borrowing $600,000, for example, you could get up to $6,000 back. If you’re not expecting it, it’s like a mini Lotto win.
To be eligible for a cashback you’ll need to change banks, go through a full loan application, and you’ll probably – not always – need a lawyer as well (you’ll want to factor in about $1,500 in legal fees).
It might sound like a bit of a palaver, but trust us when we say it’ll be well worth the time and effort.
Think of it in terms of how much you earn per hour.
If you get a net $6,000 cash back and it took you 10 hours of work, you’re earning the equivalent of an hourly rate of $600 after-tax. If we convert that out to an annual salary, it’s the equivalent of $2 million a year. Nice.
If you take advantage of cashbacks as often as you can, and use the lump sum to reduce your mortgage each time, you’ll end up knocking about 2 years off your loan term. On a $600,000 loan that’ll save you $53,000 in interest costs.
Moral of the story?
Refinance your mortgage every 3-4 years to make the most of cash backs. It’s worthwhile.
The more you know, the more money you can save in the long run.
Other things to know about refinancing
Restructuring
If your loan structure isn’t really working for you anymore, refinancing is a great way to give things a refresh. When you refinance you can also extend your loan term to reduce repayments, combine a few loans together to free up cashflow, or release a property as security if you have multiple investment properties.
Clawbacks
All cashbacks are subject to a clawback period. These vary by lender but typically last three to four years – and you’ll usually want to stick with the new bank for at least that long. If you don’t and you choose to sell or refinance elsewhere, you’ll have to repay all, or part of, your previous cashback.
In an environment where rates have fallen, and you’re on a really high fixed rate, it might make sense to incur a partial clawback so you can refinance at a lower rate. You’ll be able to use the cashback you get to help cover any break fees with your old bank. Whether or not this is worth doing is something your Squirrel adviser can work out for you.
Legal fees
As mentioned above, there are normally legal fees involved when you go ahead and refinance (around $1500). Squirrel advisers can get you sorted with a free refinancing service with some lenders, but only if your property is owned in your personal name(s). If it’s owned by a company or trust, then it must go through a lawyer.
Interest rate movements
You will need to be aware of the risk of interest rate movements during the refinancing process. Once we’ve submitted your loan paperwork to your new bank, it usually takes between 5-10 days to get approval and for rates to be locked in. Rates can move at any time. So, if they go up in the interim you may end up on a higher rate than you first thought.
It’s critical to chat to an adviser who can walk you through the process, explain all the risks up-front and help you come up with a plan of attack.
That’s a lot to take in, so here are the pros and cons of refinancing in a nutshell
| Pros of refinancing | Cons of refinancing |
|---|---|
| Cashbacks – There’s potential for a great cashback (up to 1% of your loan value). | Admin – There’s some admin involved in setting up an account with a new bank, but many can do a ‘bank switch’ to take care of direct debits, etc. |
| Refresh / restructure – It’s a chance to lock in a new loan term to better suit current and future needs, and release equity and cashflow. | Legal fees – Some banks offer free refinances, but otherwise it will cost $1000 - $1500 in legal fees. |
| Interest rates – You could nab a lower interest rate, and save on interest (be aware of interest rate movement during the process). | Application – you’ll need to do a full application for your new loan, with all the paperwork. |
| Better experience – If you’re not happy with your current bank, try something new. | Clawbacks – your old bank might clawback some of your previous cash offer, or there might be break fees involved if you need to exit your current loan before term. |
Tip 4: Be aware the risk of break fees
When interest rates are high and likely to start falling soon, you are going to want to be super cautious of the risk of break fees.
Break fees are a big, ugly penalty you’ll get stung with for “breaking” or repaying a fixed rate loan early if mortgage rates have fallen since you fixed.
When we say fixing long term is like playing with fire, break fees are why. And the risk is greater the longer you fix for.
The calculation goes like this:
[The amount interest rates have fallen since you fixed] x [Loan balance] x [Years until the fixed rate matures] = Break fees
Say you fix for 5 years at 6.50%, but decide to break your loan after two years when rates have fallen by 1.50% to 5.00%.
In that case, the break fee would be $1,500 on every $100,000 you’ve borrowed for each of the three remaining years it was fixed (0.015 x $100,000).
On a $600,000 loan, the full cost is 0.015 x $600,000 x 3 years = $27,000.
Oof.
A final caution: when interest rates are high, you sometimes see longer-term rates sitting below shorter-term ones. If you’re struggling to makes ends meet, that can be extremely tempting. Do. Not. Get. Sucked. In.
This usually only happens when the markets are expecting interest rates to start falling. And when rates do fall, it will happen fast – usually because by that point we’re in a recession.
Long-term rates might be cheaper up-front, but will come with a nasty bite if you want to repay the loan early to take advantage of better rates once they start falling.
Avoid fixing long term at the top of an interest rate cycle.
Tip 5: Pay as you get paid
Make life a little easier on yourself by syncing your mortgage payments up with your pay cycle: weekly, fortnightly or monthly.
Because of how repayments are calculated, as long as you’re just paying the minimum amount there’s no point stressing over trying to make more frequent payments. It won’t shrink that loan any faster.
If you’re currently making monthly repayments but get paid fortnightly, this could be a nice gentle opportunity to start chipping a little extra off your loan. Take the monthly repayment amount, halve it, and pay that on a fortnightly basis instead.
You’ll end up paying off roughly an extra month each year.
Line up your mortgage with your salary.
Tip 6: Find ways to pay extra (where you can)
Even putting the littlest bit extra towards your loan can make a big difference in terms of getting it paid off faster.
The best way to go about it is to set your regular repayments above the minimum, and try to increase how much you’re paying whenever you can – regardless of what’s happening with mortgage rates.
You can choose to increase what you’re paying when you refix, or you can usually increase your repayments by up to 20% in any given year without penalty.
As an example, if you up your repayments by 5.00% every year (which is about what household incomes increase by annually) you’ll be able to reduce your loan term by about 14 years, and pay your mortgage off in a smidge under 16 years.
On a $600,000 loan, that’s going to save you $250,000 in interest.
When you hit big life milestones that cause expenses to drop – you finish paying off your student loan (woohoo!) or the kids leave home – set some of that newly- freed up cashflow aside for the mortgage instead. Since you’ve already had that cost factored into your budget anyway, chances are you won’t miss it moving forward.
And when we start to see mortgage rates falling (hopefully soon) try to keep your repayments at, or close to, where they’ve been at higher rates, even once you’ve refixed and got a better deal. Any extra dollars will go straight towards repaying your loan principal – and the further rates drop the bigger difference it’ll make. We’re talking years shaved off your loan term.
However you do it, you don’t need to go overboard. Small incremental increases really add up over time. But however you go about it, if you stick with it this tip it could seriously change your life.
Try and increase your repayments every time your loan matures – even if it’s just a little.
Tip 7: Use your revolving credit as it was designed
A revolving credit facility is when you’ve got part of your mortgage balance sitting in a transaction account, where it behaves pretty much like an overdraft.
The cool thing about revolving credit is that it gives you the freedom to throw every spare dollar you have at paying down your mortgage, while still giving you access to funds if you need them in an emergency. More on that in a moment.
A good approach to a revolving credit facility can be to use it as a “house account”. Get it set up so all of your regular house-related payments (mortgage, rates, insurance) come out of that account. The idea then is to transfer more than what’s needed to cover those payments each month, and pop in extra funds where you can, to build up a cash buffer.
(Side note: unless you’ve got Jedi-level self-control when it comes to spending, we’d recommend keeping your revolving credit totally separate from your day-to-day banking.)
Essentially, the goal is to chip away at what you owe on the revolving credit, to bring the balance back to $0. For that reason, you’ll only ever really want to have an outstanding balance equal to what you can repay over 6 to 12 months.
Then, once a year, or whenever one of your fixed rate mortgages matures, you can use some of the buffer you’ve built up to make a lump sum payment towards that loan – while potentially keeping some funds in the revolving credit facility as that emergency buffer.
As an example: if your regular mortgage payments are $3,200 per month, but you’re transferring $3,600 per month to your revolving credit, that extra will help you get your mortgage paid off 6 years faster and save you $138,000 in interest.
There are other benefits to holding your emergency funds as the undrawn limit in your revolving credit, rather than in a savings account. Most savings accounts will earn you returns of about 4.00% per year pre-tax if you’re lucky, or about 2.50% after- tax. Meanwhile, paying down your mortgage saves you about 6.00% in interest – so a much better use of funds.
It’s worth noting that your revolving credit balance will be on a floating mortgage rate, which will generally be higher than the fixed portion of your mortgage.
Revolving credit facilities let you go hard on paying off your mortgage, while still giving you access to funds in an emergency.
A better rate
For those of you who DO want to keep savings separate, we’d be remiss not to mention Squirrel’s saving and investing options. Earn 4.00%p.a. and keep your money on call or put your money in a term investment and earn up to 7.75%p.a.
Tip 8: Plan ahead
Some people love surprises, some people hate them – but when it comes to your mortgage, you’ll want to avoid them at all costs. That’s why it’s always a good idea to plan ahead, especially if you know there are big changes in the pipeline.
Let’s say you’re due to roll off low fixed rates in the next few months. ‘Today You’ probably wants to pretend it’s not happening, but ‘Future You’ will appreciate a heads up on what those new repayments look like, so you’re not scrambling to get the budget sorted when D-Day hits.
And you’ll want a strategy for how you’re going to structure your mortgage, too.
Often it makes sense to split your loan across different terms, especially in a rising rate environment. But when rates are set to fall, you’re probably better off looking to bring it all back together. That way it’s easier to refinance down the line and you won’t incur nasty break fees on part of your mortgage.
Here’s an example: say you’ve got half your loan rolling off a fixed rate shortly, with the other half coming off a fixed term a year after that.
It won’t make sense to refinance now, while part of your loan is still on a decent low rate. But if you’re through your claw back period, or will be soon, you’ll want to keep that in mind. If you refix the portion that’s rolling off now for another year, then everything will mature at once – and you’ll be free to refinance, get a cash back and negotiate on rates.
When it comes to investment properties, planning ahead means having a strategy for when your interest-only term expires, or if you need to reset the loan term if the loan has been in place for a long time.
Get your mortgage set up in a way that supports your other goals in life. As mentioned, a revolving credit facility can work especially well if used as intended. If you struggle with motivation, you might find splitting out a small part of your mortgage really helps – so you can put a short term goal around it. You eat an elephant in bite size chunks, and your mortgage is definitely an elephant!
One way to do it would be to split off an amount you can repay in five years – say $50,000 – then focus on repaying it as quickly as possible. Then it’s just rinse and repeat.
Planning ahead gets more important the closer you get to retirement or reducing your work hours. Banks become reluctant lenders as your income falls, so it pays to get the right structure in place well in advance that’s going to work in later years. That could mean splitting your lending across different lenders, putting in place buffers, and getting yourself back to maximum loan terms and maximum interest-only. It’s tough to make this happen after your income falls.
So, there you have it. Let’s take a look at a quick recap of our top refixing and refinancing tips:
1. The “best” refix strategy will change depending on where rates are, and where they’re headed.
2. In the long-run, fixing for 1 to 2 years is pretty much always your best bet.
3. Refinance your mortgage every 3-4 years to make the most of cash backs.
4. Break fees can be substantial if interest rates fall, so avoid fixing long term at the top of an interest rate cycle.
5. If you’re making monthly payments, halve the amount and pay it fortnightly.
6. Make small incremental increases in your loan repayments whenever you can.
7. Revolving credit facilities can help you pay off your loan faster.
8. Plan ahead, and consider splitting your loan across several fixed terms.
All calculations are based on a $600,000 30-year mortgage at a long-term interest rate of 5.00%.
Interest rates and fees mentioned are accurate as of October 2023 and are subject to change.
We recommend seeking financial advice before taking action.
Heading for a rollover soon?
Get in touch with a Squirrel adviser today for help plotting the right course for your mortgage.
Don’t just take our word for it
Fraser Worthington
New Zealand
Aatish is excellent to deal with. Gave great advice and guidance through the process. A++, would trade again.
Mario
New Zealand
We dealt with Emma Wallace for our first home purchase and she was excellent. Emma is knowledgeable and very sensible, she gives the necessary information and makes things easy to understand. I would highly recommend Emma to anyone who looking to buy a property.
Lisa and Erick
New Zealand
Tessa was amazing, she kept us on track, and explained everything- we always knew what was happening. Her responsiveness was excellent, she was a real legend. We are so so happy with the result and will recommend her to everyone we know!
Scott
New Zealand
Mayank was fantastic and a pleasure to work with.