How to win the bank home loan rate war

How to win the bank home loan rate war

As home loan rates plunge to new lows, you may be wondering how you can win the bank rate war. The answer may be as simple as picking up the phone.

Last week we saw ANZ cut its fixed rates to as low as 2.68% per cent. This was in response to CBA slashing its fixed rates by up to 50 basis points just the week before.

Both of these changes saw even more loans fall under the 3 per cent bracket. This means home loans rates starting with a 2 are becoming more and more accessible for homeowners and investors.

Are you in a position to haggle?

Before you try to nab a lower home loan rate, you’ll want to position yourself as a more ‘ideal’ borrower.

Put simply, this is a mortgage holder who:

  • Has paid off 20 per cent of the property value or more
  • Is employed full time
  • Lives in the property 
  • Is paying principal and interest

If you only tick one or two of these boxes (for example, because you’re an investor), you can still fight for a lower rate. Just keep in mind that some lenders save the lowest home loan rates for borrowers with LVRs of 80 or below.

Talk your way to a lower rate

If you’re currently paying off your mortgage, an interest rate cut could be waiting for you if you pick up the phone and ask for one.

First, you can arm yourself with as much ammunition as possible:

  1. Check what rate your bank is offering new customers, as it’s often more competitive than existing customer rates.
  2. Use a comparison table to see what other banks are offering customers.

Next, you can call up your home loan provider, let them know you want them to lower your rate, and present your research by saying:

  • You are an ideal borrower for one or more reasons listed above.
  • You have been a loyal customer for however many years and it’s unfair new customers are getting lower rates. Here is where you provide some examples.
  • You know competitors are charging lower rates for similar loans (provide examples) and you’re considering switching.

To switch or not to switch

If your bank is unwilling to budge, or if you believe another lender is actually a better option, the time may have come to consider refinancing. After all, you have a list of lower rate lenders at your disposal now.

Keep in mind that there are fees associated with refinancing. These can include upfront fees, break fees for fixed loans, and lender’s mortgage insurance if you’ve not paid off 20 per cent of the loan.

However, the benefit of refinancing to a lower rate loan is that your mortgage repayments may reduce, saving you money in the long run. This means you could eventually break even on these fees, sometimes in a matter of months.

What are the lowest home loan rates?

There are currently 485 loans starting with a 2 in the RateCity database.

Here are some examples of home loan rates starting with a 2 that you can either use as ammunition in your negotiations or consider refinancing to:

Variable owner-occupier loans

Company Product Advertised Rate Comparison Rate
Reduce Home Loans Low Rider Home Loan

2.69%

2.71%

Well Home Loans Well Balanced Home Loan

2.72%

2.75%

Homestar Finance Star Essentials Home Loan

2.74%

2.77%

Note: Data based on lowest variable owner-occupier loans paying principal and interest on $400k mortgage over 30 years. Data accurate as at 28.20.2020.

Variable investor loans

Company Product Advertised Rate Comparison Rate
Reduce Home Loans Rate Slasher Variable Investment Loan

2.99%

3.01%

State Custodians Low Rate Investment Loan

3.08%

3.10%

Freedom Lend Freedom Variable Investment Loan

3.09%

3.09%

Note: Data based on lowest variable investor loans paying principal and interest on $400k mortgage over 30 years. Data accurate as at 28.20.2020.

2-year fixed owner-occupier loans

Company Product Advertised Rate Comparison Rate
GMCU Fixed Rate Loan Offer 2 Years

2.50%

3.91%

Well Home Loans Well Balanced Home Loan Fixed

2.68%

2.75%

ANZ Breakfree Package Fixed Rate Home Loan

2.68%

4.40%

Note: Data based on lowest 2-year fixed owner-occupier loans paying principal and interest on $400k mortgage over 30 years. Data accurate as at 28.20.2020.

2-year fixed investor loans

Company Product Advertised Rate Comparison Rate
ANZ Breakfree Package Fixed Rate Investment Loan

2.88%

4.91%

Tic Toc Fixed Investment Loan

2.89%

3.24%

Westpac Premier Package Fixed Rate Investment Loan

2.99%

4.21%

Note: Data based on lowest 2-year fixed investor loans paying principal and interest on $400k mortgage over 30 years. Data accurate as at 28.20.2020.

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Learn more about home loans

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 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 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 fixed home loan?

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.

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).

Who has the best home loan?

Determining who has the ‘best’ home loan really does depend on your own personal circumstances and requirements. It may be tempting to judge a loan merely on the interest rate but there can be added value in the extras on offer, such as offset and redraw facilities, that aren’t available with all low rate loans.

To determine which loan is the best for you, think about whether you would prefer the consistency of a fixed loan or the flexibility and potential benefits of a variable loan. Then determine which features will be necessary throughout the life of your loan. Thirdly, consider how much you are willing to pay in fees for the loan you want. Once you find the perfect combination of these three elements you are on your way to determining the best loan for you. 

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 a split home loan?

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.

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.

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.

How can I negotiate a better home loan rate?

Negotiating with your bank can seem like a daunting task but if you have been a loyal customer with plenty of equity built up then you hold more power than you think. It’s highly likely your current lender won’t want to let your business go without a fight so if you do your research and find out what other banks are offering new customers you might be able to negotiate a reduction in interest rate, or a reduction in fees with your existing lender.

What is an ombudsman?

An complaints officer – previously referred to as an ombudsman -looks at formal complaints from customers about their credit providers, and helps to find a fair and independent solution to these problems.

These services are handled by the Australian Financial Complaints Authority, a non-profit government organisation that addresses and resolves financial disputes between customers and financial service providers.

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