Home loan interest rates are currently at record lows and now is the perfect time to lower your home loan interest rate.
But not everyone has taken advantage of this and are unknowingly paying for home loans with interest rates higher than what the current market is offering.
And in a lot of cases, they are paying higher interest rates than what their own bank is offering new customers.
Where has loyalty gone right?
If you are reading this article then chances are you are going to take action to make sure you are not paying any more than what you need to be!
Luckily for you, we have some proven methods to reduce your home loan interest rate quickly and easily so can save money on your monthly or fortnightly home loan repayments.
The Research You Need To Do Before Negotiating Your Home Loan Interest Rate
Finding out your current interest rate
It’s simple but there are so many times where an interest rate discussion has come up with family or friends and they aren’t actually sure what their current interest rate is.
The starting point to getting a lower interest is first knowing what your current home loan interest rate is.
Different loan types have vastly different interest rates
There are different types of loans such as variable rate, fixed interest, owner occupied, investment property, principle and interest, interest only and many other variations.
You want to compare like-for-like when it comes to home loan interest rates. If you have an owner-occupied variable home loan that is what you want to compare with other loan providers.
The only time you would compare different loan types is when you are deciding whether or not you want to change your loan type.
Generally, banks will offer a lower interest rate for fixed rate home loans compared to variable home loan rates.
The same can be said for owner occupied home loan rates and investment property home loan rates.
The owner-occupied home loan rates are generally lower.
Source: ING Home Loans
Having a lower Loan to Value Ratio (LVR) can get you cheaper rates
The Loan to Value Ratio is the amount of money remaining on the loan divided by the value of the property. If it was a recent purchase you can usually use the purchase price as a good indication for the value of the property.
Let’s say you bought a house for $600,000 and you paid a 20% deposit ($120,000) which means you would need a $480,000 home loan to buy the house. This would mean you had an 80% LVR
$480,000 (remaining loan) / $600,000 (value of the property) = 0.8 or 80% LVR
If you have been paying your home loan off for many years you might only have $300,000 left on your home loan and in this example your house price will generally have increased in value too but lets use the initial purchase price just for this example
$300,000 (remaining loan) / $600,000 (value or property) = 0.5 or 50% LVR
Having a lower LVR makes you less of a risk to the bank and some providers will reward you with reduced home loan interest rates.
Source: Macquarie Home Loans
Do the simple math, work out your LVR and use it as a bargaining chip.
Research Competitors Home Loan Rates
By this stage you should know your current interest rate, what type of home loan you have and a rough estimate of your LVR now it is time to do some interest rate comparisons!
Start by using some of Australia’s best home loan interest rate comparison sites
Find a competitor who is offering a great home loan interest rate that matches the loan you currently have, write it down and that will be added to the bag of bargaining chips you will use later.
Keep in mind if you are with one of the Big 4 banks it is extremely unlikely they will match or even get close to what some of the alternative smaller lenders will offer you. If you are finding yourself in this position, to get the lower rates you could refinance.
Is your current home loan provider offering new customers a lower home loan interest rate?
Banks will offer lower interest rates for new customers to be competitive, but unless you are monitoring it regularly you may miss that they have lowered these rates for new customers and you are still on their old rates.
Loyalty in the banking world doesn’t go far these days, but if you do notice that the rate they are offering new customers is lower than what you are paying I would call this the lowest hanging fruit in negotiating your home loan rate with a high chance of a quick result.
Before ringing your bank to get your home loan lowered double check to see the rate that they are offering on their website and write it down.
After this you should have gathered all the following information; your current home loan interest rate, what type of loan you have, your approximate LVR, what the competitors rates are for a like-to-like loan, how interest rate compares and whether or not your bank is offering a lower home loan interest rate to new customers.
Customer pros & cons that can enhance your negotiating power
It can cost banks thousands of dollars in advertising costs to acquire you as a client and once they have you as a client you can end up paying over $250,000 in interest over a 30 year loan with an interest rate of 3%.
An ideal customer is worth a lot to the bank and they want to keep you which might mean they are willing to give you a reduced home loan interest rate to keep you.
To give yourself the maximum negotiating power in lowering your interest be the ideal customer
And that’s the initial research phase and the knowledge you need to go into your negotiations with. Keep in mind if this is a little overwhelming you can reach out to a mortgage broker of your choice who will help you with this.
Educating yourself on the different types of loans and what’s available options you have makes the discussions with your mortgage broker a lot easier. Get the best home loan for you and not what the mortgage broker 'thinks' is the best home loan for you.
Proven Ways To Negotiate A Lower Home Loan Interest Rate With Examples
Time to take some action!
Is your mortgage interest rate to high?
If you have completed the research phase above and reached this point, the chances are you have realised you are paying to much interest and now you want to know what you can do about it!
Doing this for the first time can seem a little bit daunting and overwhelming.
What if the bank say no?
What if it doesn’t go to plan?
What if they make notes on my file that aren’t favourable?
All I can say is after you’ve done it once, it becomes addicting and you’ll find it easier and easier each time you have to go through this process.
The first step is negotiating a better deal with your current bank.
If you can avoid the paperwork of refinancing it’s a bonus but in some cases where the interest rate difference is going to cost you thousands of dollars a year it can be worth making the change for a better deal.
Ask your mortgage broker to send through a pricing request
This is the easiest place to start because it involves a very quick call to your own mortgage broker or even an email asking them if they can send through a pricing request to your current bank because you have noticed cheaper rates on the market or even cheaper rates for new customers at the bank you’re already at.
I tested this in an email to my own broker and this is exactly what I said
This resulted in lowered interest rate instantly but they didn’t match the competitors rate but they did match the lowest rate they were offering new customers.
That is another thing to keep in mind, most mortgage broker will settle for any reduction, if you really want to squeeze every last drop out of the interest rates reductions, you need to make a phone call yourself.
Call your bank and ask them to match the interest rates they offer new customers
Some banks are known for not negotiating below their advertised rate so the best you may be able to do if you are adamant on staying with your current bank is having them match the interest rates they are advertising to new customers.
This is where your research work from earlier can come in handy.
When I went with this approach I found a home loan interest rate for the same type of loan that was lower, worked out my LVR, I had not missed a payment and asked as a loyal customer all I want is to be offered what the rate new customers were getting.
It was a very quick process and the rate was lowered again.
And that was only 3 weeks after my mortgage broker had already got it lowered.
So don't think just because you've got your rate lowered recently they won't do it again if you notice they have dropped their rates for new customers, call them again.
Ask your bank to send you an email with the amended rate so you have record of it.
I got a family member and a friend to try this method as well and within 5 minutes they had the same result although their banks didn't match what they were offering new customers they only lowered their rate.
What to do if your bank won’t match what they are offering new clients
This is where loyalty goes to die.
If a bank can’t offer it’s current customers the same rate as it’s new customers you should seriously consider refinancing.
But before it gets to that stage you can try playing hard ball.
The Barefoot Investor Book provides a script you can follow to play hard ball with thanks to Scott Pape
Source: Barefoot Investor
You can tell your bank exactly what you are looking for using this method and feel confident in rejecting a decrease if it still doesn’t match what new customers are being offered or the lower rate you can get elsewhere.
Scott Pape call it his "$22,064 Phone Call Script" because it has the potential to save you that and more.
If you have a $500,000 loan at 3.2% interest rate and you were able to get that lowered to 2.80% that's a saving of 0.40%
It doesn't sound like much of a change but here are the numbers
$500,000 loan
3.20% Monthly Repayment = $2,162
2.80% Monthly Repayment = $2,054
What you save:
Saving of $108 per month
Saving of $1,296 per year
Saving of $38,880 over a 30 year loan
If the bank won’t come to the party… it’s time to change bank
The bank won’t negotiate my interest rate at all, what now?
If they still won’t negotiate at all that’s when you can ask for the discharge form (forms needed to switch bank) which can sometimes trigger a sudden change in heart from the bank as they would usually prefer to keep you for the difference rather than lose you and it shows you are serious about leaving.
If they don’t offer you what you want then ask for the forms to move bank, it’s time to swap bank!
The refinancing involves paperwork, if you want to hand this off to someone else find a mortgage broker you trust.
Please, please…PLEASE! Read the research section before you ring a mortgage broker and educate yourself on the difference between a variable loan, fixed rate loan and in some cases you can split the loan into 1 portion variable and 1 portion fixed. The more you educate yourself on the different types of loans the better the outcome will be as you explore the perfect option for your situation.
Conclusion
1. Do your research
2. Use your research in your negotiations
3. Refinance if your bank won’t negotiate
Let us know in the comments how much you were able to save on your home loan interest rate!
Excellent advice Jimmy! I have followed your steps and a two minute phone call instantly saved me thousands of dollars!!