On the hunt for your forever home? One of the most crucial (and terrifying) steps of becoming a new homeowner is settling on an affordable interest rate for your home loan.
Did you know you can negotiate your interest rates with your lender? Whilst it can be intimidating standing up to a big bank and asking for a better rate, an uncomfortable phone call is worth having more money in your pocket! An interest rate negotiated to even 0.5% lower can save you thousands of dollars throughout the loan.
Before explaining how you can negotiate a better interest rate on your loan, we will break down some interest rate jargon.
What’s the difference between a principal and an interest-only loan?
When you secure a home loan, it’s in two parts: the principle and the interest. The principal is the amount you borrow from your lender. The interest is the amount charged by the lender for borrowing the principal.
What is a Principal and Interest Repayments home loan?
Principal and interest repayments are where you pay the principal and its interest back to the lender.
The upside of this repayment is paying less interest over the loan, and the rate is lower than interest-only home loans. Also, a principal and interest home loan get your loan paid off quicker. Making you the outright owner sooner rather than later.
The downsides to a principal and interest repayment are that the repayments are higher than interest-only loans and may not be as tax-efficient for investment loans.
What’s an interest-only home loan?
An interest-only home loan is when you only pay the interest portion of your home loan for a set period, like the first five years of a loan.
This way, you are not making repayments on the ‘principle’ unless you opt to make additional payments. When you reach the end of your interest-only period, you start paying off the principal at the interest rate at that time.
As a result, you end up paying lower interest rates during the interest-only period, but more interest over the repayment length.
The upside of interest only repayments are lower interest rates for a period of time where it is more suited to your lifestyle and the possibility for tax benefits for investment loans.
The downsides are the principal cost doesn’t reduce during the interest-only period, higher interest rate during the interest-only period, higher repayment once the period finishes and more interest payable over the lifetime of the loan.
Now you have an understanding of the types of home loans available to you, let’s run you through how you can reduce the interest rate of your mortgage.
How to get a better interest rate for a loan?
1. Research and compare
Shop around for your mortgage rates. Before you even think about applying for a loan, it is vital to get a number of quotes from different lenders, including a mix of small and big institutions.
Don’t forget to use your quotes in the negotiation. Ask your lender if they can match or beat the interest rate offered elsewhere. To keep you as a client, they should be willing to be more flexible (within reason!).
2. Make your case to the right people
Different staff members will have more jurisdiction than others, meaning some will have the power to reduce an interest rate whilst others can’t. Once you are in contact with someone at the lender, if they cannot offer you a better rate ask to speak with their customer retention team, who may have more ability to negotiate a better rate.
Once you have the right people on the line, state your case. Why do you deserve a better interest rate? How long have you been loyal to the company? Explain how you wish to stay with them, but you are left with no choice if there is a better rate elsewhere.
3. Work on your credit score
Before asking for a loan, put in your best effort to build up your credit score, so the lender is more confident in you as a repayer. Pay any other loan repayments on time or offer to pay a bigger down payment for a better interest rate.
By putting in a bit more effort to ensure you are the best candidate for a competitive home loan rate, you’ll have more lender options willing to cooperate.
4. Utilise a professional
If you’re finding attempts to reduce your home loan interest rate are failing, it may be easier to use a broker to find a home loan for you. Brokers facilitate over half of new mortgages and are expert in finding their customers the best rates possible.
Wondering how much you can afford to borrow? Try out our home finance calculator to see what you can afford with your current salary.