It’s sad, but there really is no customer loyalty in the banking system. Chances are, if you have had your mortgage with the same lender for a few years, you probably aren’t getting their best rate.
Banks typically won’t offer you their most competitive rate, you have to fight for it. But, in order to win that fight, there are certain things you need to know and certain things you need to say. Today I want to give you the tools necessary to win the battle with your bank and get a better rate.
Don’t make the call yet, understand this first…
Before you jump on the phone, guns blazing, there are a few things you need to understand. Firstly, your existing loan needs to be a variable loan. If you have a fixed loan then you have no chance of negotiating a better rate until the fixed rate has expired – that’s the whole point of a fixed rate, it’s fixed for a set period of time!
Next, walking into this fight, you need to know what your loan-to-value ratio (LVR) is. Your LVR is the ratio of the value of your loan to the value of your house. To calculate this you simply divide your loan balance by the current market value of your house and multiple by 100 to get a percentage. The formula looks as follows:
LVR = Loan balance / Property value x 100
You are going to be in the best position to negotiate if your LVR comes out to be less than 80%. This is the magic number which means you are a low risk client to the bank.
If your LVR is above 80%, the lender sees you as high risk and they justify this risk by giving you a higher interest rate. Also, they know that if your LVR is above 80% you’re not likely to move lenders because doing so would likely incur lender’s mortgage insurance (LMI). This is an additional cost which 9 out of 10 times renders the benefits of refinancing to a lower rate null and void.
So it’s not impossible to negotiate a better rate if your LVR is above 80% but you’re not in a very strong position to be negotiating. Feel free to have a crack regardless!
Finally, you need to know what a fair rate is in the current market. Good old google has your back here. Simply type into google “best mortgage rates” and a number of comparison sites will come up for your perusal.
As at the time of putting this together (November 2020) a good variable rate on a sub 80% LVR loan is around 2.7% p.a. Now obviously the fixed rates are currently lower than this but fixed rates are a whole new kettle of fish which we aren’t going to get into today.
You’re ready to make the call
Armed with your new knowledge of LVRs and rates, you can now get on the phone to the bank.
To get the conversation started you can simply say something along the lines of “Hi, I have been doing some research on mortgage interest rates and I believe I am paying to much. Can you please review my current rate?”.
With any luck, that will be all you need to do! If the person on the other line is feeling helpful, hopefully this will be enough to get the ball rolling. However, if you get resistance then you need to push a little harder.
Sometimes lenders won’t put their best foot forward unless they are forced to. Now by force, I don’t mean yelling and screaming, you simply need to show them in a calm, collected manner that you mean business and the one line that does this better than any other is…
“Can you please send me your mortgage discharge form?”.
A mortgage discharge form is your instruction to pay out the home loan and remove the lender from the title of the property. By requesting this form it shows the lender that you have done your research, you know what you are talking about and you are on the verge of refinancing.
If this doesn’t get you a better rate then chances are you probably won’t get one with your current lender and you do seriously need to consider refinancing. There is a lot to take into consideration before refinancing, which I won’t get into now, but you need to make sure the cost to refinance is justified by the reduction in interest rate.
Now if you took your loan out through a mortgage broker then this whole process is a lot simpler. Instead of you hustling the bank, your broker will do it for you. Simply call your broker and they can pressure the lender for you.
But that’s it! I hope this helps you get a better rate with your bank – sometimes all you need to do is ask. This really is low hanging fruit to help improve your financial position. One last thing I will say is that if you are successful with reducing your rate, keep your repayments the same. By keeping repayments the same, when the interest rate is lower, you will accelerate the repayment of your debt.