Your home loan might have had the best interest rate going around at the time you got it, but rates change all the time, often without people being aware. Increased interest rates can leave you paying more than you once were, and nobody wants that.
Fortunately, there is something you can do to fix this. The Australian home loan market is highly competitive, so lenders are more likely than you might think to offer you discounted rates and favourable terms in order to keep you around.
But if you don’t try, you don’t get. So here are just some of the steps you can take to get a better rate on your home loan:
- Do your research on the current rates
- Find out what rates new home owners are getting
- Don’t be afraid to ask!
- Be prepared to switch banks
How do banks change your interest rate?
Banks and financial institutions have decades of experience, and unfortunately, they can be quite good at being sneaky. Many of us have been conditioned to think that rate hikes are normal, but this isn’t the case.
Knowing how and why interest rates change can help you negotiate to get a lower rate. Here are some of the more common ways banks can change your interest rates without you realising:
Ways that banks can hike your interest rates
- Reverting to a higher variable rate when your fixed rate term expires
- Not passing on an RBA rate cut
- Increasing rates by more than the RBA cash rate
- Blaming new legislation or capital requirements
- Discontinuing you current loan product, then offering a new loan with lower rates to new customers only
- Other reasons in the terms and conditions of the loan.
How much can you save on reduced home loan interest rates?
Negotiating a better interest rate with your home loan provider is important, as even the smallest interest rate decrease can make a big change in how much you pay.
The following table gives you an idea of how much you could potentially save on your home loan by negotiating a half a percent reduction in your interest rate. The figures are based on a home loan over 25 years, comparing the difference between a 4.60% rate and 4.10% interest rate.
| Size of loan | Difference in monthly repayment | Cumulative difference over 25 years |
|---|---|---|
| $400,000 | $113/month | $33,779 |
| $500,000 | $141/month | $42,225 |
| $600,000 | $169/month | $50,670 |
| $700,000 | $197/month | $59,115 |
| Source: CANSTAR. Based on a 25-year loan, the difference in repayment between 4.60% p.a. and 4.10% p.a. interest rate. | ||
1. Do your research: Current home loan interest rates
The average standard variable home loan rate on offer at the time of writing is just 4.49% p.a., while the lowest standard variable home loan rate available is 3.67% p.a. So, what interest rate are you paying?
Doing research on the local property market is the very first thing you should do before negotiating with your lender. Have a look around at the various banks and lenders to see what interest rates they’re offering.
This will give you a good idea of whether you’re paying too much over the average in terms of interest and can give you a good bit of bargaining power if you show that you know your stuff. Make sure you look for loan rates that are at or below the market average.
2. Find out what new customers are paying
You might find that you’re paying more for your home loan than other, newer customers are being offered. Lenders tend to offer new loanees discounted rates and special features that existing customers don’t get, so you are within your rights to ask yourself, “Why aren’t I getting them, too?”
The best way to approach a lender about this is to prove your loyalty to them. If you’ve been with them for years and have always made your repayments on time (or ahead of time), then make the most of this. Ask them why a new customer should be given a much better deal than you when you’ve been with them through thick and thin?
Apart from the interest rate, if you’re otherwise happy with your existing home loan and lender, why not phone them up and ask them to lower the rate on your loan. Your knowledge of the average rates on the market will help you discuss the situation with more authority. Don’t be afraid to drop into the conversation what some rivals are offering while you’re at it.
3. Don’t be afraid to ask
Ask and you shall receive; do not ask and you shall not receive. Many customers want lower interest rates, more useful features, or smaller home loan fees, but they are hesitant to ask for it or don’t realise that they can ask their financial institution for it.
You have nothing to lose and much to gain by enquiring about a lower interest rate, so do it! Using your knowledge you have gained from step 1 above, call your lender stating that you have found a better offer from your competitor.
Be firm and direct, and state very clearly that you are thinking of switching (even if you aren’t). Be firm and direct, as despite what you might think, your business is important to them, particularly for something as substantial as a home loan.
Negotiating for an interest rate that’s just 0.50% lower than your existing rate can save you a significant amount of money over the duration of the loan. So don’t throw that away by not wanting to bother anyone.
4. Know the property’s value
Home loans are strongly affected by the property’s value. You can amp up your negotiating leverage by knowing this. Value isn’t just the monetary amount of the property, but it can also include other factors such as location, accessibility and security. if the property has an existing structure, you should also look into its age, previous renovations and repair, and if applicable, any certifications or permits from the local government.
Lenders will be straightforward informing you of their offers, knowing that you can easily say ‘yes’ or ‘no’. They will be hesitant in offering you an unreasonable loan if you’ve demonstrated that you’ve done some groundwork. This gives you better leverage to ask for the amount that you want and can afford. Keep in mind that many banks are often reasonable when it comes to negotiating as this can be more affordable to them compared to losing your account to a competitor.
5. Prove your worth
One of our best weapons when hunting for a better home loan deal is reputation as a borrower. If you’ve got proof of a long history of making your loan repayments on time – and even making additional repayments if allowed – you’ll have more power at the negotiating table.
Providing loan statement dating as far back as possible as concrete proof that you are the type of customer any lender would love to have.
