Homeownership is a significant milestone, but as life changes, so do financial needs. Restructuring your mortgage can be a powerful tool to align your home loan with your current financial situation. This guide will help you understand what mortgage restructuring means, how it differs from refinancing, and the potential impact on your financial future.
What Does It Mean to Restructure a Mortgage?
Restructuring a mortgage involves modifying the terms of your existing home loan to better suit your current financial circumstances. This could mean changing the length of your loan term, adjusting your interest rate, or switching to a different type of mortgage structure.
For example, if your income has decreased, you might restructure your mortgage to lower your monthly payments by extending the loan term. Alternatively, if you're aiming to pay off your mortgage faster, you might restructure to a shorter term with higher monthly payments.
Restructuring vs. Refinancing: What’s the Difference?
While both restructuring and refinancing involve making changes to your mortgage, they are distinct processes:
Restructuring typically involves modifying the terms of your existing mortgage with your current lender. It’s a way to adapt your loan to your changing financial needs without taking out a new loan.
Refinancing involves replacing your existing mortgage with a new loan, often from a different lender. This can be done to secure a better interest rate, change your loan type, or tap into your home’s equity.
In simple terms, restructuring is about tweaking your current mortgage, while refinancing means starting fresh with a new loan.
Affordability: Making Your Mortgage More Manageable
Your home loan payments are likely one of your largest monthly expenses, so when your budget is under pressure, they can become a focal point. If you’ve held your mortgage for several years, there may be opportunities to restructure it to ease financial strain.
Restructuring for affordability might involve extending the loan term to reduce monthly or fortnightly payments or temporarily switching to interest-only payments. However, it's essential to approach these options with caution.
Extending the loan term can indeed lower your payments, but it also means you'll be paying interest over a more extended period, which can significantly increase the total cost of your loan. For instance, if you have a $600,000 mortgage at an 6.7% interest rate, paying it off over 25 years will cost approximately $1,237,963. If you extend that term to 30 years, the total cost jumps to around $1,393,800, based on calculations from our mortgage calculator.
What Is an Example of Loan Restructuring?
Consider a homeowner who originally took out a 25-year mortgage. After 10 years, their financial situation changes—they've started a family and have new financial commitments. The homeowner might choose to restructure their mortgage by extending the remaining 15 years to 20 years. This adjustment would lower the monthly payments, providing more financial flexibility for the family.
Alternatively, if a homeowner receives a significant pay raise and wants to become debt-free sooner, they could restructure their mortgage to a 10-year term, increasing monthly payments but reducing the overall interest paid.
What Happens When You Restructure Your Loan?
When you restructure your loan, your mortgage terms are adjusted to fit your new financial situation. Depending on the changes made, this could result in higher or lower monthly payments, a longer or shorter loan term, or a different type of interest rate (fixed or variable).
It’s essential to understand that while restructuring can provide relief or help you achieve new financial goals, it’s not without consequences. For example, extending your loan term may lower your monthly payments but increase the total interest paid over the life of the loan. Conversely, shortening the term may increase your payments but save you money in the long run.
Does Restructuring a Loan Affect Your Credit Rating?
Restructuring your loan doesn’t typically have a direct negative impact on your credit rating, especially if you're maintaining timely payments. However, it’s important to note that if restructuring is done as a last resort to avoid default, it could signal financial distress, which may indirectly affect your credit score.
If restructuring involves extending the loan term, it could be seen as taking longer to pay off debt, which might have a slight impact on your credit profile. However, the overall effect is usually minimal compared to other factors like payment history and outstanding debt.
Is Restructuring the Right Choice for You?
Restructuring a mortgage can be an effective strategy for managing your financial obligations and achieving long-term goals. However, it’s crucial to weigh the benefits against the potential costs and consider your long-term financial plans.
If you're contemplating restructuring your mortgage, consulting with a mortgage adviser can provide valuable insights tailored to your situation. We can help you explore your options, understand the implications, and make a decision that aligns with your financial goals. need an expert eye looking at your options? Give us a call on 0800 005 676 today.
In conclusion, restructuring your mortgage is a practical option for many homeowners in New Zealand. Whether you’re looking to lower your monthly payments, pay off your mortgage sooner, or simply align your loan with your current financial situation, restructuring offers flexibility and control. Just be sure to consider the long-term impacts and seek professional advice to ensure it’s the right move for you.
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