Watching your mortgage repayments go up months on end may be causing a fair bit of anxiety in your household. It’s no wonder, with many lenders passing on rate hikes to customers in step with the RBA. As an example, according to one source, in the May-September period this year, the cumulative rise in repayments has added more than $1,000 a month on a $800,000 loan*.
Depending on your loan arrangements, getting a lower rate—either with your current lender or by moving to a new lender—could potentially save you hundreds, if not thousands, of dollars a year in interest repayments.
But negotiating doesn’t come naturally to some of us, and interestingly, historically borrowers with home loans between three and five years old, on average, have been paying around 58 basis points above the average interest rate for new loans#.
So, are there steps that you can take to try and reduce your home loan repayments? We asked Catherine Denney, Mortgage Broker at Nook Money to share some ‘inside’ tips, which may help increase your chances of negotiating a lower home loan rate.
1. Do your research
Before you pick up the phone to your bank, do your research to find out how your current rate (and other home loan features/attributes) compares to those offered by other lenders. There are three important areas to research:
- The rate your current lender is offering to new customers. Lenders usually offer a lower rate to new customers to attract new business. It seems unfair (and it is), but it’s the way the market works. Finding this out could be as simple as visiting your lender’s website, or consider asking your broker.
- The best rate being offered by one of your lender’s major competitors. It’s important that it’s a major competitor to your lender, otherwise they may not give it much credence. If you’re not sure who the main competitors are, consider asking a broker.
When comparing rates, it can be a good idea to make sure you’re comparing the ‘comparison rate’, not the advertised headline rate. The comparison rate represents the true cost of the loan, and all lenders are legally obliged to provide one. The comparison rate takes into account the interest rate, but also fees and charges that apply.
Just as important is to consider comparing your current loan from a holistic perspective—comparing against those with similar product or loan arrangement features. For example, if you have a package loan, then comparing it to the package loan from the competitor. If you have an investment property loan, making sure you’re not looking at the competitor’s owner-occupied loan rates (which are usually cheaper).
If the comparison is not like for like, then it probably won’t be a valid reference point for your lender to benchmark against.
You also need to consider things such as your LVR—or Loan-to-value ratio (i.e. the size of your loan compared to the property value). Lenders tend to typically charge higher interest rates for loans over 80% LVR (because the loan is considered higher risk) and many may offer bigger discounts for loans under 70% LVR (or thereabouts). Therefore, what you’re seeing on the lender’s website may not be a rate that is available to you.
- Any cashback offers being offered in the market for refinances. This could help to boost your case for leaving when you speak to your current lender.
2. Know your selling points and limitations
It’s important to bear in mind that certain factors can help your case for a lower interest rate, whilst others can hinder it. Being realistic is important in knowing what might be achievable and in feeling satisfied with the outcome of your negotiations. The factors that could help you include, for example:
- Having an LVR under 80% (if it’s lower than 70%, you may have even more negotiating power)
- Having a perfect repayment history
- Having a large loan size (e.g. banks can often fight harder to keep a loan over $1 million)
- Having a package loan (rather than a basic product).
On the other hand, if you have a LVR over 80%, have missed repayments in the past and/or have a small loan size, lenders may often not lower your rate as aggressively (or at all). They also may be less likely to lower your rate if you’re on their basic product.
3. Ring your lender and make your case
When you call your lender, have your research in hand, so you can speak with confidence and clarity. As a potential starting point, tell your lender you would like them to review your current home loan based on the research you have completed (e.g. competitor rates, new customer rates, etc.).
And, if you are a ‘good’ borrower (e.g. a low LVR ratio and / or strong repayment history), be sure to draw the lender’s attention to this to further support your case.
Some lenders may offer you a rate reduction on the spot, while others may go away and review your file and then come back to you with an offer.
With many lenders, you may also find that their first offer is not their best offer—by persisting further and re-emphasising your case, they may offer an even lower rate.
Final thoughts on negotiating your home loan rate
At the end of the day, if your lender is not willing to reduce your interest rate, consider whether you want to remain loyal to them when you may be able to save money by taking your business elsewhere.
Coupled with your interest rate, you may also wish to consider your home loan’s features, and whether there is a cheaper, but still appropriate product available with your lender (or elsewhere). And, if you need help, consider talking to a mortgage broker, as they may be able to do most of the leg work for you, which could end up saving you a lot of time and hassle—bear in mind that a fee may be payable for their services.
The information contained in this article represents the views and opinions of Catherine Denney, who is not affiliated, associated, authorised, or endorsed by us. In addition, this information is intended for educational purposes only, and does it take into account your objectives, financial situation and needs. For further information or clarity on anything that has been discussed in this article, please consider seeking qualified and professional advice.