Refinancing Lucy Dean outlines exactly what you need to do to get a better mortgage rate.
Australian borrowers are refinancing at record rates as mortgage repayments race higher, pushing homeowners to the brink. However, experts are reminding borrowers of the power of a phone call with their current lender before they jump ship.
A big bank borrower with a $1 million owner-occupier loan, currently paying 5.86 per cent, would save $29,801 over three years if they managed to negotiate a 1 percentage point cut, RateCity analysis shows.
A smaller, 0.25 percentage point cut, would still be worth it – saving $2500 in the first year and $7466 over three years.
It’s really just a matter of picking up the phone and being prepared to wait for a little while to get through to a real person, says managing director at Pure Finance, Brendan Dixon.
“In 2022 we did 489 [home loan] reviews for clients, and the average discount we negotiated was 0.26 per cent, which worked out to be $101.65 per month, per customer,” says Dixon.
“In terms of the scope of savings, it depends on how big their loan is, and how bad their interest rate is. But I would say it would be pretty easy – if they took a loan out two years ago – to be saving thousands rather than hundreds.”
This is what you need to do and say to have your best shot at saving.
Get your ducks in a row
Understand what product and interest rates you have | Before you go toe-to-toe with your lender, you want to know the product you have. If you’re on a variable offset product, then you need to be looking at what the variable offset product is at your current bank and what they are advertising to new customers,” Dixon says.
That new customer offer will generally be what you’re aiming for. Once you’ve found your current rate and the bank’s leading rate, you can work out the premium you’re paying as a result of being a loyal customer.
Your interest rates should be on every statement, but many borrowers only receive those every six months. That means you may need to log in to your online banking and grab your interest rate from there.
Find your lender’s best deal, and other lenders’ best deals | You’ll also want to look at what other lenders are offering for variable offset loans.
Ideally, you will have two or three rates from other lenders that would apply to your loan, says RateCity research director Sally Tindall. When it comes to the phone call, don’t be afraid to name-drop them, she says. It shows your lender you’re serious and prepared to move.
Understand your loan-to-value ratio | Your loan-to-value ratio (LVR) simply reflects how much of the property you’ve paid off, and is given as a percentage.
For example, someone who has paid off 20 per cent of their loan will have an LVR of 80 per cent.
“The percentage that you borrowed is important. If someone only just took out a loan [with a 10 per cent deposit], they’re not going to get as good a discount as someone who bought a few years ago and has got more equity,” says Dixon.
You can figure out your LVR by finding the value of your property and comparing it with your loan balance.
So, if you were to hop online, you could punch in your address to an online valuation tool like Domain. Then it’s a matter of heading to your online banking portal and looking at the loan balance.
If you found your property was worth $1 million and you had a loan balance of $700,000, then you’d know that you have an LVR of 70 per cent.
The lower your LVR, the easier it will be to negotiate.
Check this is worth your time | Glen James, former financial adviser and host of the My Millennial Money podcast, had a rate review in late 2022, and under his new interest rates, he will be saving $380 a month across his two mortgages.
He generally uses a mortgage broker, but for the purposes of his podcast he wanted to see what it was like negotiating with his two lenders directly.
“I think it was about no more than half an hour [on the phone] per lender,” he says.
While it was more than worth his time, he notes that it doesn’t make sense for all borrowers to call up their lenders.
For example, if you’re in the middle of a fixed-rate period, then you’re not going to be able simply to reduce your rate.
And if you took out the loan or refinanced in the last six months, there’s “probably limited scope” for your bank to budge on your rate, he says.
But if you haven’t moved, purchased or had a rate review for more than a year, there’s a fair chance you’re on a higher rate than a new customer, Tindall adds.
“For example, an owner-occupier who took out a CBA basic variable loan just 12 months ago is likely to be paying 0.42 per cent points more than what the bank is offering new customers today,” Tindall says.
“On a $1 million debt, this translates into more than $4000 in extra interest over the next year alone.”
If you have a mortgage broker, adds James, it’s a good idea to speak to them before you make any moves as they may be able to save you a lot of hassle.
Your broker can put through the rate review on your behalf and save you the rigmarole, and should also be able to present a stronger case as they’ll have a better understanding of what a borrower like you could get elsewhere.
And if your lender doesn’t end up moving, a mortgage broker will also be able to help you refinance successfully.
Pick up the phone
It’s go time. Generally, you’ll just call the main number of your bank and navigate through the phone menu to the existing home loan customer line.
Some banks will allow you to email them or message them as well.
As Tindall notes, you have a good chance of landing a better rate. With a record $19.5 billion refinanced in November, banks are keenly aware that their customers aren’t afraid to move.
As a result, the banks are in the mood to negotiate, particularly if they think you might be a flight risk,” she says.
State your case, be specific and ask for the retentions team Once you’re speaking to a human, it’s a matter of telling them you’re reviewing your home loan interest rates and are considering refinancing.
“Some banks have got a retention department, but generally it’s existing loan accounts queries, or general queries [that you speak to first],” Dixon says.
“So, you can say, ‘Hey, I noticed you’re advertising 4.79 per cent for new customers, I’m paying 5.25 per cent, why is that? I’ve also noticed Bank A and Bank B are offering 4.79 per cent, what can you do to keep me?”
If other banks are offering even lower rates than your lender’s best rate, it’s worth noting – but don’t get your hopes up about achieving that.
Then, you ask to speak to someone who can help. It may be the person you’re already speaking to, but you may be put through to the retention team, or the pricing team.
“Their role [in the retention team] is to try to stop you from leaving, so you’re speaking to the perfect person,” Dixon says.
Staff in the retention team will generally be authorised to approve larger interest rate reductions than those on the immediate frontline, James says.
If your first point of contact, generally at the existing home loan customer line, isn’t being helpful (or they’re not offering a big enough discount), you can also ask to speak to the manager.
Ask for, and then weigh up, a cashback | Rather than, or in addition to, a reduction, your lender may offer you a cashback as a sweetener to stay.
You can also ask for one. This is particularly useful if your bank hasn’t lowered your rate as much as you were hoping.
“Once your lender comes to you with an offer, you don’t normally have a counter, but it’s definitely worth trying,” Dixon says. Try something like this: “Look, it’s still pretty far from what your competitors are offering. Can you do any better? Otherwise, I think I’m still going to leave. Or, can you throw in a cashback for me?”
Other lenders will offer cashbacks to lure you. The trick is ensuring that the cashback, which range from $2000-$6000, isn’t covering up a bad, long-term deal, Dixon says.
“It’s a marketing tool by the banks. They might say, ‘Our interest rate is 5 per cent, our cashback is $5000,’ and then you have the second bank saying, ‘Hey, our interest rate is 4.7 per cent, but we’re not offering a cashback.” It’s up to you (or your broker) to do the maths.
Call in the cavalry | James says if you’re still not getting quite what you want, you say: “Will something in writing from my mortgage broker help with the pricing request?”
That’s when – if you have a broker – you go to them and ask if they can put something on their letterhead with your name and details, listing a couple of other lenders available.
“I’ve done that before in the past, I’ve emailed them a letter,” James says.
Pull out the big guns | If that doesn’t work, you should be prepared to move, the experts agree. “If they still don’t budge, you can opt to play hard ball by asking for a mortgage discharge form,” Tindall says.
“That could be enough to call their bluff. By this point, you should have the bank begging you to stay but if you’re still unhappy with the rate – well, you’re halfway to refinancing anyway, so you may as well go the whole hog and get yourself a decent rate cut.”
You can do the refinancing process yourself, or engage a mortgage broker.
Get the best deal
Dixon says there’s at least a 90 per cent chance of success for borrowers tilting at a lower rate, particularly if their loan is one year old or more.
But not all existing lenders will go as low as their new customer interest rate.
“There will be some lenders that will give the advertised interest rate when asked … but you need to have the conversation to find out. Different lenders have different retention policies, and they can change during the year,” he says.
The discount you can get will also depend on how much you’ve been overcharged.
Let’s say the advertised interest rate is 4.89 per cent, and you’re on 5.3 per cent. There’s a good chance you’ll get a reduction. But if your interest rate is 4.99 per cent, your lender will be less inclined to shave off that 0.10 per cent because you’re already close to the advertised rate.
Additionally, your chances of getting an interest rate that is lower than your current lender’s best rate – say a competing bank’s leading rate – are fairly slim. But it’s worth asking – the worst they’ll say is no, and they may say yes, saving you the switching fees.
Where to next?
Either you got what you wanted, or maybe it’s time to move and save more.
As noted earlier, a borrower with a $1 million loan with a big four bank and 5.86 per cent interest rate could save $29,589 over three years if they moved to the average 4.84 per cent interest rate offered to new customers, RateCity found.
However, if they were to refinance with a new lender to a 4.50 per cent interest rate, they’d save $39,336 over three years – including switching costs.
“The sharpest rates are typically reserved for new customers, no matter how good your negotiating skills are, so it’s worth considering refinancing,” she says.
The good news is, if you’ve made it to this stage, you understand your positioning in the market and will have a better idea of who would be willing to take you on and what your chances of success actually are.
“If you own less than 20 per cent of your home, at today’s values, you might find you’re in ‘mortgage prison’, unable to refinance,” says Tindall. “That’s because most new lenders will charge you lenders mortgage insurance even when refinancing, which could potentially negate any savings you might make from switching banks.
“Conversely, if you’re an owner-occupier and own over 30 or even 40 per cent of your home, then you’re in the box seat when it comes to rates. Use it to your advantage.
