Should You Refinance with Your Current Bank or Switch Lenders?

When your fixed mortgage term is ending or you're considering refinancing, one of the first decisions you face is whether to stay with your current bank or switch to a new lender. This choice significantly affects your refinancing experience, costs, and outcomes. While switching lenders can deliver better rates and terms, staying with your current bank offers convenience and potential relationship benefits. Understanding the advantages and disadvantages of each approach helps you make informed decisions that genuinely serve your financial interests.

This comprehensive guide examines the pros and cons of refinancing with your current bank versus switching lenders, explores the "loyalty tax" and how to avoid it, provides strategies for negotiating with your current bank, explains what to expect when switching lenders, and helps you determine which approach makes sense for your specific situation.

The Case for Staying with Your Current Bank

Refinancing with your existing lender offers several advantages worth considering.

Convenience and Simplicity

Staying with your current bank is undeniably easier than switching. The refinancing process is faster with reduced documentation requirements since your bank already has your information. Settlement is simpler without transferring mortgages between institutions. You maintain existing systems and familiarity including online banking, apps, and payment arrangements.

For busy people who value time and simplicity, this convenience has genuine value even if it means accepting slightly less favorable terms than available elsewhere.

Relationship Benefits

Long-term banking relationships sometimes deliver benefits. Your bank knows your payment history and reliability, potentially making them more flexible during financial challenges. Package deals or relationship discounts might be available if you maintain multiple products with them. You have established contacts and familiarity with their processes and systems.

Lower Refinancing Costs

Refinancing with your current bank typically involves lower costs. Some banks waive application fees for existing customers. Legal costs may be reduced as mortgages aren't changing hands. Valuation requirements might be less stringent for existing customers. Break fees don't apply if you're refinancing at your fixed term expiry.

These cost savings can be substantial, potentially offsetting marginal rate differences between your bank and competitors.

Faster Processing

Internal refinancing usually processes faster than switching lenders. Your bank already has your employment and income verification on file. They have recent property information and previous valuations. Credit checks and assessment are simplified for existing customers.

If timing is critical—perhaps your fixed term is expiring soon—staying with your bank ensures refinancing completes quickly.

Simplified Tax and Accounting

For investment properties, maintaining loans with the same bank simplifies accounting and tax reporting. Switching banks means updating all tax documentation, informing accountants of new loan numbers and institutions, and adjusting automatic payment systems.

The Case for Switching Lenders

Despite convenience advantages of staying, switching lenders often delivers superior financial outcomes.

Access to Better Rates

The primary reason to switch is securing better interest rates. Different lenders compete aggressively for new customers, often reserving their best rates for borrowers willing to switch rather than existing customers. Even a quarter percent rate improvement saves thousands over your loan term.

Competition benefits borrowers who actively shop around rather than passively accepting what their current bank offers.

Avoiding the Loyalty Tax

The "loyalty tax" refers to banks charging existing customers more than they charge new customers for equivalent products. Banks count on customer inertia—the tendency to stay rather than switch despite worse terms—and exploit this by offering better deals to new customers while maintaining less competitive rates for existing customers.

By switching, you ensure you're receiving competitive market rates rather than paying penalty rates for loyalty.

Superior Features and Service

Different banks offer different loan features and service quality. Perhaps your current bank lacks offset accounts, flexible repayment options, or other features you value. Maybe their customer service is poor or their digital banking platforms are outdated.

Switching allows you to access features and service quality that better suit your needs rather than settling for what your current bank provides.

Leveraging Competition

When you're actively refinancing and considering multiple lenders, you create competitive tension that benefits you. Lenders know they must offer attractive terms to win your business. This competition delivers better outcomes than negotiating solely with your existing bank, who knows switching requires effort you might not be willing to invest.

Fresh Start Benefits

Sometimes switching provides psychological benefits of a fresh start, particularly if you've had difficulties with your current bank or feel they haven't served you well. Starting new banking relationships can provide renewed engagement with your finances.

Understanding the Loyalty Tax

The loyalty tax is real and costs New Zealand homeowners thousands of dollars unnecessarily.

How Banks Exploit Loyalty

Banks invest heavily in acquiring new customers through attractive rates and offers. They recoup these acquisition costs by gradually moving existing customers to less competitive rates over time, counting on most customers not bothering to refinance elsewhere.

Research consistently shows existing customers pay more on average than new customers for equivalent products. Banks explicitly budget for customer attrition—knowing some will leave for better rates—but profit from the majority who stay despite worse terms.

Calculating Your Loyalty Tax

Compare the rate your current bank is offering for your renewal against best available rates from competitors. If your bank offers six point two percent while competitors offer five point eight percent, you're paying zero point four percent loyalty tax.

On a five hundred thousand dollar mortgage, this costs you two thousand dollars annually—twenty thousand dollars over ten years. These figures make the effort of switching worthwhile for most borrowers.

Why Customers Pay Loyalty Taxes

Several factors cause customers to accept loyalty taxes. Switching seems complicated and time-consuming. Fear that application might be declined with new lenders keeps people with current banks. Many assume their bank is offering competitive rates without checking alternatives. The convenience of staying outweighs modest rate differences for some people.

Understanding these factors helps you consciously decide whether loyalty tax costs justify convenience rather than unconsciously accepting worse terms.

Negotiating with Your Current Bank

If you prefer staying with your current bank, negotiation can improve outcomes significantly.

Research Before Negotiating

Never negotiate without knowing what competitors offer. Get rate quotes from at least three other lenders so you know current market rates. Understand not just rates but also features, fees, and overall value propositions.

This research provides leverage and ensures you're negotiating toward genuinely competitive outcomes rather than just slightly better than your bank's initial offer.

Timing Your Negotiation

Start negotiating three to six months before your fixed term expires. This provides time for meaningful discussion without pressure. Your bank knows you're planning ahead, which they view favorably. You have time to switch if negotiations fail.

Don't wait until the last minute when you have no negotiating leverage because you must accept whatever your bank offers.

Presenting Your Case

Approach negotiation professionally and factually. Clearly state you're reviewing your options and considering switching lenders. Present specific competitor rates and terms you've been quoted. Explain you value your relationship with them but need competitive terms to justify staying.

Ask directly what they can offer to retain your business rather than waiting for them to volunteer improvements.

What Banks Might Offer

Banks have various tools to retain customers including matching or beating competitor rates, waiving fees or offering cashback, bundling discounts if you bring other business, or improving loan features like adding offset accounts.

They calculate the lifetime value of customers and often find that modest concessions to retain you are worthwhile compared to losing your business entirely.

Knowing When to Walk Away

If your bank refuses to offer competitive terms despite clear evidence that better rates exist elsewhere, be prepared to switch. Empty threats to leave aren't effective—you must genuinely be willing to follow through.

Some banks simply won't negotiate competitively, preferring to lose customers rather than matching market rates. Don't waste time with protracted negotiations if your bank clearly isn't interested in retaining you on reasonable terms.

The Switching Process

Understanding what's involved in switching lenders helps you prepare and ensures smooth transitions.

Timeline and Steps

Switching lenders typically takes four to eight weeks from application to settlement. First, research and compare lenders to identify best options. Apply for pre-approval or formal approval with your chosen new lender. Complete property valuation as required by the new lender.

Engage a lawyer to handle legal work and mortgage discharge. Your new lender approves your application and prepares loan documentation. Settlement occurs where your new lender pays off your old mortgage and your lawyer registers the new mortgage.

Each step requires coordination and attention, but the process is well-established and straightforward when working with experienced professionals.

Costs of Switching

Budget for application fees from your new lender (typically three hundred to six hundred dollars), legal fees for discharge and new mortgage registration (six hundred to twelve hundred dollars), valuation costs (depending on method used), and potentially break fees if exiting fixed terms early.

Total costs typically range from two thousand to five thousand dollars depending on your circumstances. Compare these costs against interest savings to ensure switching makes financial sense.

Documentation Requirements

Switching lenders requires comprehensive documentation including proof of income and employment, bank statements, property information, existing mortgage details, and identification. Having documentation organized before applying streamlines the process.

Working with Lawyers

Your lawyer coordinates most of the switching process including requesting discharge from your old lender, preparing new mortgage documentation, registering the new mortgage, and managing fund transfers on settlement day.

Choose experienced property lawyers who handle refinancing regularly to ensure smooth, efficient processing.

Comparing Offers Comprehensively

Don't compare lenders based solely on interest rates—evaluate complete packages.

Looking Beyond Headline Rates

Compare application and annual fees, as these add to total costs. Consider break fees if you might want to exit early. Evaluate features like offset accounts, redraw facilities, and flexible repayments. Assess service quality and digital banking capabilities. Review maximum loan terms available and whether rates remain competitive across these terms.

Sometimes slightly higher headline rates combined with superior features or lower fees deliver better overall value than the absolute lowest rate with restrictive terms.

Calculating Total Cost of Borrowing

Model total costs over realistic timeframes—one year, five years, and full loan term—factoring in all fees, features, and rate assumptions. This comprehensive view reveals true cost differences between lenders rather than just rate comparisons.

Include switching costs in your analysis to ensure you're genuinely better off switching versus staying.

Considering Long-Term Relationship

Think about whether you want long-term relationships with new lenders or simply plan to refinance again in a few years chasing rates. Some borrowers switch lenders regularly every few years to capture best available rates. Others prefer stable long-term banking relationships.

Neither approach is wrong, but understanding your preferences helps you weight convenience against rate optimization appropriately.

When Staying Makes Sense

Despite potential savings from switching, certain circumstances favor staying with your current bank.

Marginal Rate Differences

If your current bank offers rates within zero point one to zero point two percent of the best available market rates, switching costs and effort might outweigh modest savings. Calculate whether two thousand to four thousand dollars in switching costs are recovered within reasonable timeframes through marginally lower rates.

Complex Financial Situations

If you have complex income structures, poor credit, or unique circumstances that might complicate new applications, staying with your current bank might be simpler. They already understand your situation and have approved you previously.

Switching introduces risk that new lenders might decline applications or require extensive additional documentation to approve complex situations.

Relationship Value

If you genuinely receive meaningful relationship benefits from your bank—perhaps preferential service on business banking, favorable terms on multiple products, or access to relationship managers—these benefits might outweigh rate differences.

Calculate tangible value of relationship benefits to determine whether they justify accepting slightly higher mortgage rates.

Time Constraints

If your fixed term expires very soon and you haven't planned ahead, staying might be necessary simply because switching takes longer than available time. While not ideal, accepting your bank's renewal terms for a short period then switching later is better than making rushed switching decisions under pressure.

When Switching is Clearly Better

Certain situations make switching the obvious choice despite convenience of staying.

Substantial Rate Improvements

If competitors offer rates half a percent or more below your current bank, switching almost always makes financial sense. The savings substantially exceed switching costs within months.

Poor Service or Relationship

If you're unhappy with your current bank's service, switching provides opportunity to escape unsatisfactory relationships while also potentially accessing better rates.

Don't underestimate the value of working with lenders who serve you well and make banking pleasant rather than frustrating.

Bank Refuses to Negotiate

If your bank flatly refuses to offer competitive rates despite clear evidence better terms exist elsewhere, they're explicitly telling you they don't value your business. Respect this message by taking your business to lenders who want it.

Access to Better Features

If your current bank lacks features you value—offset accounts, flexible repayments, particular loan structures—and switching provides access to these features, the improved functionality might justify switching even with similar rates.

At Luminate Financial Group, we help New Zealand homeowners navigate stay-versus-switch decisions by providing objective analysis unconstrained by relationships with particular lenders, comprehensive market comparison showing best available terms across all lenders, negotiation support if you want to try retaining your current bank relationship, and full switching support if changing lenders delivers better outcomes.

Our independence means we're not incentivized to recommend one approach over another—we simply identify what genuinely serves your best interests and support whichever path you choose.

Deciding whether to refinance with your current bank or switch lenders? Contact Luminate Financial Group for objective analysis. We'll compare your options comprehensively and guide you toward the choice that delivers best overall outcomes for your situation.