Last week, the Reserve Bank cut interest rates to a record new low and has stated that interest rates will most likely remain low for the next three years. When the Reserve Bank announces a cut to rates, the big banks and small lenders then ‘choose’ whether or not to pass on the cut to their home loan clients. Sometimes they don’t!
If your bank or lender hasn’t made any changes to your current interest rate, it could be time to open up a conversation with them about renegotiating your loan.
Moving in to a negotiation phase with any aspect of your life shouldn’t be a shotgun decision and takes quite a bit of preparation and research. Susan Mitchell, CEO of Mortgage Choice advises borrowers to “get an understanding of what a ‘good rate’ is for the type of loan you want. Write a list with the lenders and home loan products you think you might be interested in.” An example Susan provided is that “a good variable rate home loan starts with a ‘2’ these days and you may also be able to lock in a fixed rate home loan starting with a 1!”
Before you approach your lender, you might not get far if you’re not already on top of your home loan repayments, if you’ve been on a home loan repayment pause or if you have a bad credit history. If you can resolve any of those issues prior to scheduling a meeting, it would be wise to do so! “That being said, if you don’t ask, you don’t get,” Susan adds.
“If you’re a high quality borrower, lenders will fight for your business,” Susan says. “There’s no reason why you should stay with a lender if there are better, more affordable home loan options on the market.”
Keep this thought in mind when approaching your lender: as the customer, you bring a lot of business to your lender so don’t underestimate your value as a borrower in the marketplace. “When you’re confident you’re ready to start haggling, I encourage you to speak to your current lender first. Tell them you’re in the market for a better home loan interest rate and see what they offer you,” Susan advises, “It will be a lot less work on your end if your existing lender reduces your rate.”
But if your lender doesn’t budge and if you’re prepared to undergo a move to another lender, then contact the next one on the list. You can explain the situation, tell them you’re shopping around and try to get an idea of what they can offer you. Don’t take the first offer handed to you.
If all this legwork sounds far too exhausting, there’s always the option of bringing in a mortgage broker to help with your renegotiation process.
Sydney couple Lex and Sarah were eagerly awaiting the end of their 5-year fixed rate loan in December 2020, as they’d been watching interest rates fall steadily but weren’t able to reap the benefits. Lex and Sarah sought the expertise of a broker and managed to save “just shy of $1,000 a month” by refinancing their home loan (read more about their story here). “Major banks often advertise a higher rate but have a discretionary pricing team or tool that brokers have access to,” Susan says. “This allows brokers to enter in all the information required for a refinance, such as loan size, risk, LVR and location of the property. The lender pricing tool or team will crunch those metrics against the lender’s appetite.”
If you’re in a position to negotiate your loan, take these steps to get the best possible rate:
- Remember your value to the lender.
- Do your research about what others are offering.
- Write a list of your options e.g. is there any other benefit of staying with your current lender?
- Start speaking with lenders or contact a broker to do the work on your behalf.
If you’re considering refinancing and would like to understand how much you could save, use this handy Mortgage Choice tool: here.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.