How to ask your lender for a rate reduction

author-avatar By on November 26, 2020
How to ask your lender for a rate reduction

Home loan interest rates are plunging to the lowest levels in history so if your lender isn’t playing ball, don’t be afraid to demand a better deal.

By now you’ve probably heard that the Reserve Bank has once again cut the official cash rate, this time to an historic low of 0.10% - and if you haven’t where the heck have you been?!

But that doesn’t mean your lender will just automatically pass on the rate cut to you. In fact, only ten lenders have passed on some or all of the cut to variable home loans at the time of writing. Instead, most lenders are choosing to pass on the cut to fixed rate home loans, which suggests most mortgage-holders can only receive the rate cut by refinancing to these fixed rates.

This goes against previous cash rate changes when most lenders diligently passed on some or all of the cut to their existing variable rate customers.

Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers.

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.

In his speech after the announcement of the rate cut, Reserve Bank governor Philip Lowe urged borrowers to consider changing lenders if they haven’t received a rate cut.

"The best outcome would be for standard variable rates to be lowered but if that doesn't occur I'm confident there will be pass-through occurring through people renegotiating and switching... I encourage everybody to go to their bank and ask for a better deal," Dr Lowe said.

“If they don’t give it to you, switch to a bank that will.”

If it’s been a while since you reviewed your home loan interest rate, you’re probably paying too much. Negotiating with your bank can be intimidating for a lot of people so here’s a step by step guide on how to ask your lender for an interest rate reduction on your mortgage.

How to ask your lender for a rate reduction:

Do your research and compare other lenders' rates

Before you even get on the phone, you should take a look at what rates other lenders are offering and what rate your current lender is offering new customers. By doing this, you can see how your current loan stacks up and use this information to haggle for a better interest rate.

When comparing interest rates, don’t forget to look at the comparison rate (the true cost of the loan once fees have been taken into account). Looks can be deceiving - sometimes what looks like a really attractive rate can have a very high comparison rate.

Financial comparison websites like this one make it easy to see what rates other lenders are offering. A number of lenders are now offering home loans with rates below 2% while these are all the lenders who have so far taken rates below 2% in the wake of the most recent RBA cut.

Using an online mortgage switching calculator can be a great way to visualise how much money you could save by getting a lower interest rate, and give you extra motivation to demand a better rate from your lender.

Mortgage Choice CEO Susan Mitchell says it’s important to stay on top of what’s happening in the market.

“That way, if your lender, or other lenders suddenly announce a big change to their home loan pricing or incentives to join them, you can check to see if you benefit from the changes,” Ms Mitchell told Savings.com.au.

“It’s also important to remember that if you’ve fixed part of your home loan interest rate, you may still be able to renegotiate the interest rate on the variable portion of your home loan.”

Ring up your bank

Now it’s time to psych yourself up to make that phone call!

Money expert Nicole Pedersen-McKinnon provided us with this handy script from her book, Get Mortgage Free Like Me, to use in your phone call:

“Hi again, look I’m a long-time mortgage customer and I saw in the paper that the big banks are giving secret loan discounts of up to 1 whole percentage point. That means I’ve overpaid a stack and I’m annoyed.”

[They’ll probably then say] “Sir/madam, you already receive our maximum published discount for your loan size: 0.5 percent.”

You: “But that’s not 0.8… I know that on $300,000 loans ANZ gives a discount of 0.8 percent, NAB gives 0.85 percent and Westpac gives 0.9 percent. I’ve also discovered I could be paying below 2 per cent at a smaller lender, which would save me a chunk every month."

[They may then say] “Your custom is very important to us, so we’ll give you an extra 0.4 percent off to match our nearest competitor’s 0.9 percent. And we’ll throw in a case of wine.”

But they probably won’t (on either front). It’s no bad thing for you either. While the discount CBA admits to for a $300,000 loan is 0.5 percent research reveals that size loan with the majors is enough to trigger a 1.25 percent discount – if you are armed with rival offers and negotiate hard.

The key to nailing the phone call is to sound confident and the best way to do that is to have done your research before you pick up the phone. Tell your lender you’ve been shopping around and that you can see there are better deals on the market (and give examples).

Ms Mitchell says one trick that can work is to tell your lender you’re going to see your broker if they won’t lower your rate.

“Letting them know you have a broker is important as lenders know that brokers have access to a wide range of lenders with very competitive rates.”

And if you’ve only recently taken out a home loan, Ms Pedersen-McKinnon says you can still ask for a rate reduction.

“After as few as six months you should feel at liberty to ask for a mortgage discount - sooner if you see that there is a competitor offering a better deal or if your institution fails to pass on a rate cut.”

As for how often you should ask for a rate reduction, Ms Mitchell says every six to twelve months if you’re on a variable interest rate.

“It’s also a good idea to stay on top of what’s happening in the market. That way, if your lender, or other lenders suddenly announce a big change to their home loan pricing or incentives to join them, you can check to see if you benefit from the changes,” Ms Mitchell said.

“It’s also important to remember that If you’ve fixed part of your home loan interest rate, you may still be able to renegotiate the interest rate on the variable portion of your home loan.”

It’s important to stay on top of your home loan repayments if you want an interest rate reduction.

“It will be very difficult to negotiate if you’re behind or on a repayment pause,” Ms Mitchell said.

Call their bluff

If your lender isn’t willing to budge at all, telling them you want to sign a mortgage discharge form will show them you’re serious about getting a better rate.

Signing a mortgage discharge form means the lender is removed from your home loan and happens when you either pay off the loan in full or when you refinance.

Ms Pedersen-McKinnon says anything that shows you’re serious will be an important negotiating tool.

”Plus you'd do far better to shift anyway. The current cheapest variable loan in the market is now 1.77 per cent. So a ditch and switch is likely the very best way to go.”

Just remember, if you tell your lender you’re prepared to sign a mortgage discharge form, you had better be prepared to act on it too.

Be prepared to walk

Your lender may be willing to lower your interest rate but if it’s not competitive with other rates on the market and you’re still not happy, consider making the switch to another lender.

But before you switch, make sure you consider all the pros and cons of refinancing like break costs if you’re on a fixed rate and any other fees that come with refinancing.

If you’re sure refinancing is the right move for you, here’s our guide on how to refinance your home loan.

Savings.com.au’s two cents

With interest rates plummeting to the lowest levels in history, there’s no reason why you should still be paying a high interest rate on your mortgage. Refinancing your mortgage could literally save you thousands, so if you’re not happy with your rate, do your research and ask your bank to step up or switch.


Photo by Karolina Grabowska from Pexels

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.

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Emma Duffy joined Savings.com.au as a Finance Journalist in 2019 after spending a year as the editor of The Real Estate Conversation. She's passionate about empowering people to make smart financial decisions and improve the financial literacy of Australians by translating complex finance topics into understandable, relatable content.

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