Kelly and Stephanie from our Property and Private Client team recently attended The Law Association of New Zealand’s breakfast with ANZ Chief Economist Sharon Zollner. Hearing an economist’s perspective was a useful reminder of just how many factors influence interest rates and the wider economy, and how difficult it can be to predict exactly what comes next.
For homeowners, the practical message is simpler: rather than trying to perfectly time the market, it is worth periodically reviewing whether your existing lending arrangements still work for you.
If refinancing is on the table, however, there is more to consider than the interest rate.
What does refinancing actually involve?
Refinancing generally involves repaying your lending with your existing bank and replacing it with lending from another bank.
From a legal perspective, that usually means your lawyer will need to:
• review the new loan and security documents with you;
• arrange repayment of your existing lending;
• discharge your existing bank’s mortgage;
• register a new mortgage in favour of your new bank; and
• attend to any other securities, guarantees or related documentation required by the banks.
For a straightforward residential refinance, this process can often be completed relatively quickly. However, issues can arise where the ownership or security arrangements are more complicated.
That is why it is useful to involve your lawyer early.
Look beyond the headline interest rate
A lower interest rate or cash contribution can make changing banks attractive, but it is important to understand the overall cost and effect of refinancing.
Depending on your circumstances, you may need to take into account break costs on existing fixed lending, repayment of a previous cash contribution, valuation costs and legal fees.
You should also understand what security the new bank is asking you to provide.
For example, if you own several properties, operate a business or have lending through a trust or company, the bank may require security or guarantees that extend beyond the particular loan you are refinancing.
Before signing, make sure you understand not only what you are borrowing, but what you are putting at risk to secure that borrowing.
Trusts, companies and guarantees can add complexity
Refinancing is not always simply a matter of replacing one mortgage with another.
If your property is owned by a trust or company, there may be additional documentation and approval requirements. Changes in trustees or directors since your existing lending was established can also need to be addressed before new security can be put in place.
Guarantees deserve particular attention.
If you are being asked to guarantee another person’s or entity’s borrowing, the implications can be significant. The bank may require you to obtain independent legal advice before accepting the guarantee.
Similarly, an existing guarantee does not necessarily disappear simply because your lending arrangements change. Refinancing is therefore a useful opportunity to review what guarantees and securities are currently in place and whether they remain appropriate.
Has anything changed since you last arranged your mortgage?
For many homeowners, the existing mortgage was put in place years ago. Quite a lot can change during that time.
You may have:
• established or wound up a trust;
• changed trustees;
• bought or sold other property;
• started or sold a business;
• separated or entered a new relationship;
• changed the way family or business assets are held; or
• updated your succession and estate planning.
A refinance provides a natural opportunity to check whether your legal arrangements still reflect your current circumstances.
That does not mean refinancing is necessarily the right time to restructure ownership. Transferring property can have significant legal, tax, relationship property and lending implications and should not be undertaken simply for convenience.
It does, however, make sense to ask whether the arrangements put in place several years ago are still appropriate today.
Check your title while you are there
Refinancing also gives your lawyer an opportunity to review the title to your property.
There may be matters recorded on the title that you have forgotten about, or which no longer reflect the current position. Depending on the property, these might include old notices, covenants, easements or other interests.
Not every issue needs to be dealt with as part of a refinance, but if something needs attention it is generally better to identify it before settlement rather than when everyone is working towards a tight refinancing date.
Do not leave the legal work until the last minute
A common misconception is that refinancing is largely an administrative exercise for the banks, with the lawyer becoming involved only at the end.
For a simple refinance, that may sometimes feel like the case. But where there are trusts, companies, guarantees, multiple properties or changes in circumstances, there can be considerably more involved.
Banks also have their own documentation and requirements that need to be satisfied before funds can be advanced.
If you are considering refinancing, let your lawyer know once the proposal becomes reasonably firm. We can identify any legal issues early, explain what documentation will be required and work with you, your adviser and the banks to get everything ready for settlement.
Use refinancing as a legal check-in
The attraction of refinancing may start with an interest rate, a cash contribution or a conversation with your mortgage adviser. But it can also be a useful opportunity to take stock. Ask yourself: “Does the way we own our property still make sense? Are the guarantees and securities we have given still appropriate? Have our family, trust or business circumstances changed? And do our wider legal arrangements still fit where we are heading?”
Those questions can be just as important as the interest rate.
If you are thinking about refinancing or have received a refinancing proposal from another bank, talk to us early. We can help you understand the legal implications and make sure the process is as straightforward as possible.
