The household mortgage has always been one of the highest household expenses and with the rising home loan rates, increasingly bigger. How to save money and negotiate a better interest rate for many can seem like a daunting task.
For most people one phone call could result in significant savings and reduce your home loan interest rate. I will step you through the process I go follow in getting a better rate and how at times I even profit!
Step 1: Research!
It is important to remember that these sites may not always have all home loan interest rates on their sites and often the sponsored lenders are at the top of the list.
By having an understanding of the overall market you are well armed with up to date information to request a better home loan rate from your current lender.
Step 2: Understanding the interest rates and other fees or charges
Now that you have researched the various different home loan rates it is important to understand what these various rates mean. In today’s markets banks and financial lenders are competing for your money and are running very aggressive ad campaigns.
I had a recent lender call me offering me a $4000 cash back to return just mere months after swapping to another lender!
Interest rates: This is often advertised as a fixed rate or variable interest rate.
Fixed interest rates: A fixed rate loan is one that cannot be changed and is often locked in for a “fixed term” often 1, 2 & 3+ years. These loans can be very beneficial at times as it gives you a certainty around your month repayments.
However, drawbacks are they come with “break costs” and can also leave you with higher repayments if the variable rate drops significantly. Some banks limit the amount of ‘over payments’ you are able to put onto the loan.
Variable interest rates: A variable rate home loan is a home loan interest rate that will change and fluctuate over time. This home loan rate will vary over time either going up or down depending other economic factors.
In Australia, financial lenders typically increase or decrease their home loan rates in-line with the Reserve Bank of Australia (RBA) decision on the official cash rate. In much of the world variable home loans have increased significantly in an effort to combat rising inflation.
Throughout the life of the home loan the rate will change and unlike a fixed home loan rate you will benefit from deceases in home loan rates, but will also pay more when they go up.
Unlike, a fixed home loan rate, you can make over payments on a variable loan which ultimately decrease your loan term and overall interest paid.
Comparison Interest rate: A comparison interest rate is your way as a consumer to compare two home loan products side by side. Often banks will advertise very competitive home loan rates but then have additional fees and charges such as establishment fees, loan servicing and package fees.
These fees add up over the life of a loan especially when looking over an extended period of time. A comparison home loan interest rate allows you to essentially compare apples with apples, and not apples and pears!
If you see an interest rate and a comparison rate which has several basis points difference it means that other charges and fees are included in that home loan product.
Loan Application or Upfront Establishment Fee: As the name suggests, this a fee charged by a bank or lender when first setting up your home loan. This fee can often be waivered and during some period’s banks will willingly waiver or discount this fee for new clients.
Loan Service fee: This is a fee often charged on a monthly basis for the administrative costs associated with your home loan. This fee is seen in some home loan products but not all.
Annual or Package Fees: Banks will often look to add package fees to their loan products. These come in the form of an annual fee that automatically gets applied each year.
For this package fee banks will often provide a discounted interest rate, an offset account, waiver any fees such as the above establishment and loan service fees.
Additionally, some banks have other perks on their other products which may not be finance related such as insurances, travel etc. It is important to consider if this product would be right for you and consider the overall comparison rate as a starting point.
Step 3: Contacting Your Bank To Get A Better Rate!
When contacting your bank is important to be confident in your approach when requesting a discount on your home loan. I have done this several times and depending on the lender have had varying amounts of success.
I have personally found it best to be put through to the “retention team”. This is the team who deal with the customers who want to leave and will often try their absolute best to keep you as a client.
Ever tried to cancel your phone plan, TV / cable subscription? Yeah, it’s these people that want to keep your business with the business.
Now that I have called the bank and requested to be put through to the retention team I will confidently and politely say the following:
“Hi My name is ,< YOUR NAME>,, I have been banking with ,, ,for , ,and I have noticed that my home loan interest rate is no longer competitive. nnI have looked online and have noticed your competitor , ,are offering an interest rate of ,“x”, and a cash back of ,“x”. ,As a current customer what is the best rate that you can offer me?”
Whilst this may be a very brief and a basic opening line it conveys several important points.
- I have established that I am a current client of “x” number of years or months. Both of these points have their own silver linings. If I have been with the bank for a number of years, they may respect that loyalty and provide a discount.
- This may also be a negative as banks often rely on the fact long term customers are more unlikely to leave! Alternatively, having only been a new customer for <12 months I have shown that I am willing to swap lenders and could do so again without a good level of discount.
- I have established with the operator that I feel my current rate is no longer competitive.
- I have provided up to date comparative information for a rival lender which they will and should look to verify is accurate.
- Lastly, I have identified that I want a discount and have requested the best rate.
Step 4: Knowing What You Want.
Now that you have rang the bank and requested to know what their best rate is and what they are willing to offer to retain your custom you should be clear in your mind as to what you actually want.
This is a very important part as it will ultimately decide the following steps, which is, will you remain with your current lender?
If your bank refuses to offer any discount or you are not happy with the level of discount provided you can inform them of this and see if this prompts them to budge. If they are not willing to offer any further discount you still have options.
Previously I have gotten to the point where my current bank cannot offer me a better home loan rate than their competition. In these instances, I have done one or two things (again with varying levels of success).
In some instances I have accepted their discount because this is a saving none the less. However, in my mind this interaction has made up my mind and I am knowingly going to swap banks for the better home loan.
Other times I have requested to be given a “Mortgage discharge authority*”. This is a formal document used to notify your financial lender that you are wanting to discharge your mortgage from them and take your business elsewhere.
The requesting of this form has had two results. The operator simply goes “done”, “Please check your email!” Other times they have “checked” to see if there is any other possible discounts they can provide me – funny that, wasn’t any discounts 5 minutes ago when I asked!
*It is important to note that just because I have asked and been provided a mortgage discount authority form that I don’t have to do anything with it. Simply requesting this form does not automatically mean the bank will cancel my loan.
It has simply notified them that I am considering the possibility of leaving their business and going else where.