If you haven't looked at your home loan interest rate in the last 18 months, odds are you're paying too much. In spite of a cooling property market, the home loan market is still hot. Mortgage rates right now are near historic lows, and lenders are vigorously competing for consumers' business. If you've been with your current lender for some time, rates are likely to have moved significantly south since you first got your home loan.
But just because you have an uncompetitive home loan doesn't mean it has to stay that way. You may be able to get a much better rate, either with your current lender or a new lender. Here are the four steps to follow.
1. Be an attractive borrower
First, you need to be the sort of borrower whose business lenders crave. From a lender's perspective, this means you're a low risk.
To be an attractive borrower, you need to make sure to meet all your home loan repayments on time. Lenders love stable, responsible borrowers. Missed or delinquent home loan repayments will be a major red flag to lenders, and can undermine your bargaining power when trying to secure a better rate.
Attractive borrowers also have a low loan-to-value ratio, or LVR. Your LVR is the size of your loan relative to the value of your home. For instance, if you borrow $450,000 for a $750,000 house, you have a 60% loan-to-value ratio.
In general, lenders like borrowers at an LVR of 80% or below. Many lenders will offer rate incentives to borrowers with lower LVRs. If you've been paying off your home loan on time for a few years while your house has simultaneously been rising in value, your LVR will be getting lower and lower by the month. The lower your LVR, the greater your bargaining power is likely to be.
2. Compare your options
If you're the type of borrower that lenders want, you're in a great negotiating position. Now it's time to compare your home loan options.
While it's easy to just look at the headline interest rate when comparing mortgage products, you'll want to look beyond this to some of the finer details. Your goal is to get a better deal, and when it comes to home loan deals, the headline rate is only part of the story.
You'll want to look at the fees associated with home loans on the market. Some home loans carry ongoing fees that can eat into the value you get from a low rate. To determine if a home loan product is hiding high fees behind a sharp rate, have a look at the comparison rate. The comparison rate takes both the headline interest rate and certain fees into account and expresses the cost of a home loan as a percentage. If there's a wide gulf between the advertised rate and the comparison rate, you may be facing high fees.
You'll also want to look at the features included in the home loan. One particularly helpful feature is an offset account. An offset account is a transaction account linked to your home loan that works to save you interest payments. It does this by reducing the amount on which interest is calculated by the amount in your offset account. For instance, if you owe $500,000 on your home loan but have $50,000 in an offset account, you'll only be charged interest on $450,000. Your repayments won't change, but a greater proportion of your repayment will be devoted to paying down the principal of your loan rather than the interest.
Because offset accounts mean you're paying more on principal and less on interest, they can shave literal years off your home loan and save you thousands of dollars. A home loan with a slightly higher rate that includes an offset account could actually end up being better value than a cheaper home loan without one.
3. Talk to your current lender
Once you've got a good idea of your own negotiating power and the rates on offer, it's time to talk to your current lender.
Call your lender and tell them that you've been looking at the rates on the market and you're unhappy with the deal you're getting. Quote some of the other rates on the market and tell them that you want them to match the best advertised rate you've seen.
Lenders are highly motivated to keep your business if you've been a responsible home loan customer. In general, it costs much more to onboard new home loan customers than to retain current customers. Your lender won't want to lose you and is likely to be willing to negotiate.
4. Be ready to walk away
In the event that your lender isn't willing to come to the bargaining table, you need to be ready to follow through on your threat and walk away. This will mean refinancing your home loan with a new lender.
Refinancing will take a little bit of work on your part. You'll have to get some documents together proving your identity and verifying your employment and income details, as well as your liabilities and expenses. You'll also have to go through the home loan application process again, just like you did when you first got your mortgage.
Refinancing can also carry some costs with it. You'll likely have to pay a discharge fee to your old lender. This fee usually runs up to a couple of hundred dollars. You may also have to pay application and settlement fees to your new lender. Once again, this is likely to cost a few hundred dollars. However, over the course of your home loan, a sharper rate can save you thousands.
For example, if you have a $500,000 home loan at 4.50% interest, the total cost of your loan over 30 years would be $912,033. That same loan at 4.00% interest would cost you $859,347. That's a $52,686 difference. Put it in perspective and the time it takes to compare your options and ask for a better deal seems well worth it.