Last month, a reminder in my phone told me it was that time of year again: time to ask for a rate reduction on my mortgages (I have three). I got to work.
Yesterday I got a call from the bank, telling me I’d received 0.25% drop on all rates. On my home alone, that’s worth over $26,000 over the life of the loan. It took me an hour in total to get it done.
There aren’t many places you can make more than $25,000 in one hour with your clothes on and your dignity intact, but your mortgage is definitely one of them.
After sharing on social media last night, I’ve had a deluge of shares from people who’ve done the same, and a pile of questions about how to do it. This post is for the latter group, particularly those who want to stay with their current lender (I’ve excluded the option of changing to another lender, though of course that’s a feasible option if your bank won’t move).
I’ve included my personal scenario as a worked example throughout this post so you can see the process in action.
Step 1: Find your current rate
Do you know what rate you’re currently paying on your mortgages?
I’m surprised how often the answer is ‘no’.
That rate determines how much your monthly repayments are, and how much you’ll pay back on your property over the life of the loan. The lower, the better.
But you won’t know if you can do better until you find out what you’re currently paying.
You may find your rate is competitive and there isn’t much rom to go lower. In that case, you can say: “What a pleasant surprise!” and carry on with your life.
You may find you rate is not competitive. In that case, read on.
How do I know what’s competitive?
Google is your friend. Look up comparison sites. Head to the home pages of the major banks and see their advertised rates. Call or email a mortgage broker and ask that they can do.
Worked Example: My rate was not bad, but not great
I’ve got three loans, all with the same bank:
- $44k balance on 4.12% (set as owner-occupier)
- $149k balance on 4.70% (set as investment)
- $607k balance on 4.12% (joint with husband, this one is our home)
Two months ago, the 2x owner-occupier loans started with a three, but thanks to an out-of-cycle rate increase (read: the Reserve Bank of Australia didn’t put the rates up, the bank did that of its own accord) they now started with a four.
A Google search revealed 3.59% offers, and I could see some Big 4 banks with 3.8 – 3.9% advertised.
I got in touch with a broker to see what he thought might be achievable to keep the homeloan with a Big 4 bank, with an offset account and no fees. His opinion was 3.84% was possible with the same lender, and we could do some restructuring to get the investment down to something comparable if I was keen.
Which I wasn’t – restructuring means paperwork. I detest paperwork. In this case, I’m taking the lazy tax hit.
3.84% became my target, with a matched drop on the investment loan.
Step 2: Choose your course of action
Having identified an opportunity to drop your rate, you’ve got two choices:
- Do it yourself
- Get someone (usually a mortgage broker) to do it for you
People often jump to the second option because the thought of asking for a discount is enough to make them squirm. I went with option 1 and it took less than 10 minutes, all of which were pleasant. So don’t immediately think you must get a broker on board.
If you’re on the fence, here’s some advantages of each option:
Advantages of using a broker
- They’ve got volume on their side – having lots of clients with one institution gives them power to push for a better deal than you might achieve alone.
- They do this for a living – if you find bargaining icky or it scares you, delegation is likely preferable. These guys will get it done cleanly and with minimum ick for you.
- They know the market – this was much more useful pre-Google. It’s a marginal benefit now.
- They’re a good testing ground – if you’ve got concerns, for example your income has changed and you don’t want to draw attention to it with the bank, a broker can help you work out what’s the best way to approach the bank. This tends to be a consideration if switching banks or restructuring, not important when it’s just a rate reduction you’re after.
Advantages of doing it yourself:
- Trailing commissions – the bank will pay a trailing commission to the broker AND have to give you a rate discount. If they can just give you the same discount, they’re better off doing that in terms of profit. You can use this to your advantage.
- Time saving – this might sound contradictory, after all mortgage brokers do everything for you, right? You still have to bring them up to speed, and they’ll still try to work through all the alternatives. The less scrupulous ones might ‘encourage’ you into something you don’t want to do, that causes headaches later on. I’ve done it both ways, and I’ve found DIY quicker.
- Practice – negotiation is a critical skill. This is a safe environment to practice that skill. I think you’d be mad to pass it up ESPECIALLY if you find bargaining icky – you’ve got the most work to do.
If you go with a broker, you can stop reading here. Hand over to them for the next step.
Worked Example: I decided it was DIY time.
Step 3: Ask for a reduction
Start with your existing lender. You’ve already got the loan, you’re on their books, and they don’t want to lose you. Unless they’re lazy or stupid, they’ll try to keep you.
Also, changing lender means paperwork. Ugh. So see if you can avoid it first, before going down that path
There are scripts to ask for rate reductions all over the place – Ramit Sethi’s script is a good one, but you’ll have to pay for it (with your email address).
You can ask a variety of ways:
- In person – visit your local branch, ask to see the loans person, and ask them for a reduction on the spot (if they’ll see you – you may have to make an appointment).
- On the phone – call the bank and ask to speak to the loans department. Ask them.
- Via email – this one is best if you have the personal address of a bank employee.
Then it’s as simple as saying/writing:
I’d like a reduction on my mortgage rate please.
At this point, it’s a good idea to have a target in mind. Sometimes you’ll be asked where that came from. ‘A broker’ is a good response and gets you out of the ‘we can’t match that rate because we have better services/more branches/better online systems/better options/to pay our directors more’ (kidding!) debate.
Worked Example: Asking nicely.
My local branch has kindly put the photo, name, email address and phone number of my local loans manager on the outside wall. I took a photo walking past last week.
I went the email route. Here’s the text of that email:
I’m a customer of XXXXX with three mortgages.
I’d like to discuss a rate reduction following an approach from a mortgage broker. I want to see if you’ll match their rate before I sign with them.
Can we chat in the phone tomorrow (Tuesday) after 11am please? My number is XXXX XXX XXX.
We spoke on the phone, Bob* asked what my number was. I said 3.84%. He said he’d put in a request to head office because this was more than he could approve locally and get back to me the following day. He was polite, helpful and true to his word – he called back the next day saying he’d got 3.87% and 4.45% respectively, and would I accept that?
I agreed. We parted happy. Job done. Total time on phone for two calls: two minutes.
Same loan. Same bank. Still have an offset. Still have no fees. No paperwork. #winning!
*Name changed for privacy reasons – I haven’t asked for Bob’s approval to share this story, but I think he’ll be OK with it 🙂
What if they won’t reduce?
Sometimes you get a call back that’s not favourable, or the person you’re talking to fobs you off (it’s happened to me in the past). Two common reasons/excuses for not reducing:
- You’re on a fixed loan – because you fixed it earlier, or it’s new/in the honeymoon period. If there’s a financial penalty for lowering the rate, it’s rarely worth pursuing, but run the numbers just in case.
- They can’t compete – so they’re not going to lower it because betting you can’t be bothered switching. They don’t say that to you, by the way. So now the ball’s in your court: are you annoyed enough to switch? Or are you just gonna stick with the status quo and try again next year?
What’s it worth, anyway?
The answer depends on your mortgage terms.
To help you work it out, I’ve created a simple calculator in Excel. You can download it (no email required), enter your loan info in the yellow cells and you’ll see what it’s worth to you over the life of your loan.
Worked Example: $31,050
For my loans as above:
- $44k: $697
- $149k: $3,984
- $607k: $26,369
Basically a lot. Not bad for a bit of effort.
Now, it’s important to note I won’t actually save that much. I have a whopping offset account against the biggest home loan, so I don’t get charged anywhere near that amount of interest. I do this instead of paying down the balance so I have ready cash to invest with whenever I want (for example, if there’s a swift drop in the stock market or I spot a bargain property). But every little bit counts!
Since I posted about this last night, I’ve had calls, comments and private messages from people who’ve done this, either off their own back earlier this year or did it today in response to my prompt. They all came back with drops of at least 0.25% – the record so far is 0.81%.
So, what are you waiting for? No need to be paying an ignorance/lazy/scared tax. Get onto it 🙂