How To Negotiate A Better Home Loan Rate

Top of your list of considerations when taking out a home loan is likely the interest rate offered. Interest rates determine how much your monthly repayments will be as well as the total amount you’ll repay over the term of the loan. It's rate that is a lender’s first offer their best offer. Knowing how to negotiate your home loan interest rate can help you get the best possible offer for your circumstances.

How to negotiate your rate as a first home buyer

There are plenty of lenders out there with a range of offers vying for your business. Many offer low-interest-rate honeymoon periods for new buyers, usually a fixed interest rate for a period of up to five years.

Understanding which offers are worth your time and how to negotiate them is where a mortgage broker can come in handy. Mortgage brokers deal with lots of types of lenders and should have plenty of experience finding loans for people similar to you, regardless of your situation.

Once you’ve established your eligibility for a loan, a mortgage broker can negotiate with their panel of lenders for the best available rate. They can often get your existing bank or financial institution to match an interest rate being advertised by a competitor.

A word of caution

Be wary of the terms and conditions that often accompany lower interest rates to ensure that you are still coming out ahead. For example, you may be hit with much larger annual fees with a loan that has a lower rate. That loan may also lack features such as redraw and offset facilities.

You also need to be extra wary of low-interest-rate loans such as fixed-rate loans. These types of loans offer an enticingly low rate for the first few years, during which the rate is locked in, but they will later revert to a much higher variable interest rate once the fixed period ends.

You could also consider a split home loan — part fixed, part variable — but it’s always advisable to talk to a home loan expert before choosing this option.

How to negotiate your rate as a homeowner

As an existing homeowner, you may have the option to renegotiate or refinance your mortgage with either your current lender or a new one.

Many existing mortgage holders don’t necessarily keep an eagle eye on their interest rate. So, they wonder after a period of years — or even a decade or more — if the rate is still competitive.

If your goal is to get a better interest rate, your first port of call should be your current lender. If they agree to your rate request, you can save yourself all the accompanying rigmarole of switching loans and changing lenders. You’ll still need to complete paperwork, and it may involve taking out a new mortgage and closing the old one, but it’s generally less disruptive than working with two lenders.

For more leverage during your rate negotiation, it helps to show your lender that a competitor is offering a better deal. If you have a strong repayment history — especially over several years — your current lender may be willing to match the offer to retain your business.

Other considerations

If you can’t get the rate you want from your current lender, refinancing is an option, but there are a few things to weigh up first. While the interest rate is important, it’s not the only consideration.

Your term

The term — or length — of the mortgage is another major factor that will affect your repayments.

If, for example, you’re paying off a 25-year mortgage and you refinance into a new 30-year loan, you may end up paying more overall in the long run, even with a lower interest rate. It’s typically recommended that you refinance with the same term as your current loan — or even a shorter one, if possible.

Your comparison rate

You will also need to factor in fees and charges and features such as redraw and offset accounts. Once these are accounted for, you’ll arrive at the comparison rate — a figure that reflects the true cost of the mortgage.

The comparison rate should not differ significantly from the advertised interest rate, but it provides a more complete picture of the loan’s cost. Be sure to compare like for like — that is, a variable-rate loan with another variable-rate loan of the same term.