How to negotiate a lower interest rate on your mortgage

In this era of record-low interest rates, many homeowners and investors fall into the trap of thinking they will automatically be getting a great rate on their mortgage.

Unfortunately, that’s not the case and by putting in a little bit of time and effort it has the potential to shave tens of thousands of dollars off the interest you’re paying on your mortgage.

Most borrowers, stay with one lender for the lifetime of their loan and quite often it is with the lender they have traditionally banked with. While this might be the easiest and most comfortable option, it pays to shop around.

Getting the best deal on your interest rates all starts with doing your research. If you know what the best rates in the marketplace are, then you’re able to make an informed decision and you can then look to negotiate.

Senior Finance Executive at Specialist Morgage, Bridget Bowman, suggests that all borrowers must do their research and then ask the question of either their current lender or a specialist mortgage broker.

“Research is key when negotiating a lower interest rate – firstly you need to check the rate on your existing loan and compare it to what other rates are available in the current lending environment,” said Ms. Bowman.

“If you feel your current rate is too high, you can approach your mortgage broker who can negotiate on your behalf with the lender or you can go to the lender directly to ask them to match the lower rate. It never hurts to ask the question. If they are unable to lower their rate to an acceptable level, it may be worthwhile considering refinancing to a new lender.”

Another important thing to note about interest rates is that new borrowers often receive the best and lowest rates. While long term customers are often forgotten about and stuck with higher rates.

Director of Multipart Finance, Tim Russell says that lenders are oftentimes happy to match interest rates, rather than lose a valuable customer.

“Typically, existing customers of a lender will have a higher interest rate than what is offered to new customers. They do this as they are aware that even though existing customers knew they were on a higher rate, they are still likely to stay with the same lender,” said Mr. Russell.

“When we do annual reviews for our clients, we will give them a report detailing the existing package they are currently on and the three best offers that are available in the market. We then use this tool as a bargaining chip to renegotiate with their existing lender.”

“Quite often the existing lender is happy to match what is available elsewhere but if they’re not, then it’s simply a matter of calculating what the interest saving would be refinancing to the new lender versus the total cost of exiting the current lender. If the savings are significant enough then it’s always worth doing in my opinion.”

Understanding what sort of interest rate is achievable from the bank's perspective is also a very important part of the equation.

Generally speaking, different interest rates will apply depending on the type of borrower you are. If you have a clean credit history, a stable income and require a lower LVR, then you should expect that most lenders would not only be happy to lend to you but would offer you a lower interest rate.

On the flip side, if you are looking at a high LVR interest only, investment loan, without full documentation of your income, then most likely lenders would assign you a higher risk and therefore a higher interest rate.

Founder of The Investors Way, Andrew Woodward says that once you know where your bank is coming from as well as your own credit situation then you can start to negotiate with lenders more directly.

“Try not to be too aggressive in your negotiation tactics – understand that the bank needs to be comfortable with the deal too. A simple rule of thumb is that the bank wants to earn approximately 1.5% above what they are paying. So if the official rate in Oz is 0.75%, add 1.5% and you get 2.25%,” said Mr. Woodward.

“In recent times banks have been asking for a lot more than 1.5% above the official rate, but that doesn’t mean you can’t negotiate to get a better deal. Most of the major banks have rates above 3% but we are starting to see some of the smaller lenders offer rates that start with a 2.”

Once you know what interest rate you are able to obtain, Mr. Woodward says that it then becomes a matter of weighing that up against the costs of refinancing.

“Understand the costs of changing banks to ensure the reduced rate you are moving to is worth it. You don’t want your costs of moving to offset any gain from the reduced rate, especially when the costs are paid upfront and the interest rate benefits are over time."