Four ways you can convince your bank to pass on the latest rate cuts

Four ways you can convince your bank to pass on the latest rate cuts

Whether you’re looking to buy, build, invest or refinance, right now Australians have access to some of the lowest home loan interest rates on record.

After the RBA cut the cash rate to an historical low of just 0.75% on Tuesday, home loan rates have dropped as low as 2.69%.

Since June this year, the cash rate has been cut by 75 base percentage points. Two 25 base percentage point cuts in a row in June and July, and another 25 base percentage points this week.

The bad news is that many of the big banks are not passing on the full rate cut, opting instead to cut somewhere between ten and sixteen base percentage points.

The good news is that the banking giants are in a highly competitive home loan market, and if they haven’t passed on the rate cuts in full, you can still negotiate.

In order to negotiate a lower rate on your home loan, you may want to try one of the following four tactics:

#1 Shop around and find the lowest rates on offer

Before you contact your bank to negotiate a lower rate, make sure you shop around and compare home loan rates. You can access the latest rate changes after the RBA cut via the RateCity Rate Tracker.

Peer to peer lenders, neo banks and non-bank lenders can often have much lower rates than larger financial institutions, so compiling a list of loans similar to yours is very useful.

If, for example, you are able to find multiple lenders offering much lower rates than you are currently receiving, you can use this data a bargaining chip to secure a lower rate.

This type of independent financial research will increase your financial awareness and potentially open your eyes to better deals that could save you thousands of dollars over your loan term.

#2 Ask for the same rate as a new customer

Lenders will often provide low rates and discounted offers in promotions to attract new customers.

If you think that your current mortgage rate is too high, try calling your bank and finding out what rates they’re offering to new customers. If you hear a much lower interest rate than the one you are currently paying, don’t be afraid to ask your bank whether they can match the new customer offer on your loan.

In order to improve your chances of getting that lower rate, it may help to gather the following information to prove you’re a loyal customer and reliable debtor:

  • Proof you have never missed a payment over the length of your loan
  • Your current credit rating from both Experian and Equifax, if it’s high or excellent
  • Proof you also make repayments on time for other credit cards or personal loans you hold with the same bank
  • Details of competitor’s rates for the same loan product that have much lower rates than the new rate you are asking for.

Check your credit score for free here.

#3 Ask your bank for a discharge form

If your bank decides they cannot meet your request to match a lower rate, you may wish to challenge your lender by requesting a discharge form.

You don’t need to complete the form, but by asking you show you’re serious about moving your business to a lender with a more competitive rate.

If, after requesting the discharge form, they are still not budging on the rates they offer new customers, you have a right to look at other non-bank lenders.

This is especially true if you’re a loyal customer who has paid a 5 per cent interest rate on your home loan for the past ten years, when competitor rates are now starting as low as 2.69%.

#4 Speak to a mortgage broker

If you’re unable to negotiate your home loan rate by following the steps above, the next step is to speak to a financial advisor or a mortgage broker.

As the financial industry can be complicated, with various caveats, terms and conditions, a broker’s expertise could be the ticket to locking in a lower rate.

Refinancing is something that many debtors don’t look into, as it seems like a hassle, but refinancing to another lender with a rate that is 0.5 base percentage points lower than your current rate could save you thousands of dollars over your loan term.

Non-bank lenders give the big four a run for their money

New non-bank lenders like Athena and Reduce are currently offering some of the lowest rates and fees. Plus, you may find a lender offering outstanding customer service in a time when trust in financial advice is low. If you can’t get the rate you want with your current big bank, why not consider making a switch?

With the cash rate at a record low of 0.75 per cent, and non-bank lenders offering rates from 2.69%, there’s never been a better time to see how much you could save if you refinance.

Keep up to date with the latest rate changes with our RateCity Rate Tracker.

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Learn more about home loans

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

What is the difference between a fixed rate and variable rate?

A variable rate can fluctuate over the life of a loan as determined by your lender. While the rate is broadly reflective of market conditions, including the Reserve Bank’s cash rate, it is by no means the sole determining factor in your bank’s decision-making process.

A fixed rate is one which is set for a period of time, regardless of market fluctuations. Fixed rates can be as short as one year or as long as 15 years however after this time it will revert to a variable rate, unless you negotiate with your bank to enter into another fixed term agreement

Variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts however fixed rates do offer customers a level of security by knowing exactly how much they need to set aside each month.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

What is a honeymoon rate and honeymoon period?

Also known as the ‘introductory rate’ or ‘bait rate’, a honeymoon rate is a special low interest rate applied to loans for an initial period to attract more borrowers. The honeymoon period when this lower rate applies usually varies from six months to one year. The rate can be fixed, capped or variable for the first 12 months of the loan. At the end of the term, the loan reverts to the standard variable rate.

What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

What is a standard variable rate (SVR)?

The standard variable rate (SVR) is the interest rate a lender applies to their standard home loan. It is a variable interest rate which is normally used as a benchmark from which they price their other variable rate home loan products.

A standard variable rate home loan typically includes most, if not all the features the lender has on offer, such as an offset account, but it often comes with a higher interest rate attached than their most ‘basic’ product on offer (usually referred to as their basic variable rate mortgage).

What is the average annual percentage rate?

Also known as the comparison rate, or sometimes the ‘true rate’ of a loan, the average annual percentage rate (AAPR) is used to indicate the overall cost of a loan after considering all the fees, charges and other factors, such as introductory offers and honeymoon rates.

The AAPR is calculated based on a standardised loan amount and loan term, and doesn’t include any extra non-standard charges.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

How much of the RBA rate cut do lenders pass on to borrowers?

When the Reserve Bank of Australia cuts its official cash rate, there is no guarantee lenders will then pass that cut on to lenders by way of lower interest rates. 

Sometimes lenders pass on the cut in full, sometimes they partially pass on the cut, sometimes they don’t at all. When they don’t, they often defend the decision by saying they need to balance the needs of their shareholders with the needs of their borrowers. 

As the attached graph shows, more recent cuts have seen less lenders passing on the full RBA interest rate cut; the average lender was more likely to pass on about two-thirds of the 25 basis points cut to its borrowers.  image002

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.