Getting Rid of a Fixed-rate Home Loan: Is this Possible?
When you are getting your home loan, there are different discount margins used by the lenders to calculate the net interest rate that you would be paying.
A sample of a real credit contract for a home loan is shown in the extract below:
In this example, we can note the following:
Variable-rate on the home loan is 4.92% per annum and this is what they advertise on their websites. This is a kind of Headline rate and media report this rate on their news and videos This can change from time to time depending on the funding costs of the lender. By selecting a particular loan product, the customer has received a discount of 0.85%. Anyone choosing that product will automatically be eligible for this discount. No further efforts are required from the broker or banker.
Then, there is a customer margin of 0.38% discount which is obtained by the broker’s effort at the time of loan application. We call this ‘Pricing request’ in the credit world and it is an effective way of rate negotiation for home loan clients.
If you are borrowing a variable-rate Home loan, the headline rate can change over time while the last two margins are almost constant throughout the loan term.
What does rate negotiation mean for the home loan clients?
Depending on where you are on your homeownership journey, the importance of rate negotiation can vary.
For New home loan clients:
The two important uses are:
- How much rate you are likely to pay?
- This will then be used in your borrowing capacity calculation.
For existing home loan clients:
- By doing a pricing request, you can remain competitive with your home loan i.e. updating yourself with the market rates of the interest.
- When the fixed period is over, it is mandatory to do a pricing request. Otherwise, you will be paying significantly higher interest rates.
Why do you need to do an annual review of your existing home loan accounts?
Banks operate interestingly in this space. Loyalty is not paid and in fact, loyal bank customers are charged more interest, which sometimes is called “Loyalty Tax”.
When lenders make any new announcement for a rate reduction, they treat it differently. For example, the announcement would be something like “we have reduced our home loan rate by 0.20% for the existing customers and by 0.25% for the new customers”. When it is reported on the media, you will hear something like “…Bank X has reduced its home loan interest rate by up to 0.25%”! This will create a kind of confusion in the existing customers that their lender has reduced the rate by 0.25% (whereas it is only 0.20%)! Their loan product is now 0.05% more expensive than what new customers are getting from the same lender! When this is accumulated in the long term, the difference can be significant.
Similarly, if your home loan is on a fixed rate, the discount approved by the lenders apply during the fixed-rate period only. When your home loan comes off the fixed-rate period, you need to seek help from the broker to re-negotiate the rate. You can request by filling out the MAINTENANCE form available on our website if you want Capkon brokers to be assisting with this request.
Why do banks create this confusion?
They assume that the customers are not alert about reviewing their home loans on a regular basis. The Banks have always been smart enough in attracting you with so many offers for new businesses and once you are in, they want to maintain this profitable margin with you.
No wonder why home loan divisions are considered to be the most profitable department for lenders in Australia!
How to tackle this issue?
We highly recommend our clients conduct an annual review and financial health check of their home loan. The beauty of this review is not only the interest rate, but your mortgage broker can also suggest some other money management tips and explore the possibility of managing debt in a smart way. You can book an obligation free MEETING here for a home loan health check-up meeting with the mortgage brokers at Capkon.
If you don’t want to go through the brokers, you can simply check your home loan account details and contact the customer services team or mortgage services team at your lender and ask them to review the rate.
If you are not happy with the rate you are offered after negotiation, you can consider refinancing to a different lender. However, you need to be careful about the pros and cons of refinancing your home loans. We have presented a detailed article HERE.
What determines your interest rate when negotiating?
Banks have their own internal model to do the risk-based pricing and the outcome depends on a case-by-case basis. Lenders need below information while lodging pricing request for new clients or existing home loan clients:
- Personal details
- Security location
- Estimated property Price
- Loan amount
- The product you intend to be in
- Customer profile (or type)
How to request the pricing review?
As a home loan customer, you can contact the mortgage services team at your lender directly and request for pricing discount. Sometimes they may refer to going through the mortgage broker as the loan was originated through this channel. When mortgage brokers are reviewing your home loan, they can do this as below through online tools available on the lender’s website:
- Most of them reveal their offer (response) instantly
- If the broker is happy with the offer, they accept it; Confirmation will be sent through the email
- If the broker is not happy with the offer, they can escalate your request for further consideration
How to make sure that you are getting a competitive interest rate?
While the interest rate alone is not the only criteria in choosing a lender and loan product, staying competitive with your home loan is still an important consideration.
Besides all other considerations, the selection of a lender and your home loan product depends on the interest rate as well. When comparing, we need to make sure whether you want the home loan with a fixed rate or a variable rate or a combination of both.
- Customer profile (or type)
- Competitor offer (If you have written offer from the other bank, then your claim is stronger)