Today is undoubtedly the best time for Australian’s to apply for a mortgage. Prices between lenders have never been so competitive and borrowers can really push the screws to get rock bottoms rates. Thanks to the rise of several mortgage managers over the last two decades, interest margins have dropped from 4% (back in the 90s) to 1.5-2% that are common today.
Lenders are fighting for clients so much that David Morgan, the chief executive of Westpac labelled several low-cost mortgage deals as “irrational”. While it may be true that some lenders are luring borrowers in with rock bottom deals, not every lender is following suit. Some prefer to sit on their hands until the customer asks for special rates, which makes sense from a business point of view.
Remember, the goal of the borrower is to receive the lowest rates possible, while the lender wishes to give them as little discount as they can possibly get away with.
Note: Due to the intense competition in the markets, borrowers have the ball in their court and the harder they push, the better deals they are going to receive.
Research the lenders
Research seems to be a common theme in our articles and for good reason. With it, homeowners and investors can save much more. Borrowers should be researching several lenders to see who is offering the best rates, features and flexibility. This way they can walk into bank A and explain that Bank B is offering a 0.75% discount, and what can they do to improve on that deal. Other ways to conduct research include:
Mortgage brokers: Aside from checking rates with several lenders, getting information from mortgage brokers is never a bad idea. Borrowers should look for brokers who specialise in markets based on their needs, some will be extremely knowledgeable in professional markets while having a lack of understanding for low doc loans. We advise going to at few different brokers as it’s impossible for one to know all the best rates with so many offers constantly changing.
Word of mouth: Friends, family or work colleagues can be another source of information. Perhaps someone has just gone through the whole process of looking for the best mortgage deal and can provide a lot of the brunt work on where to look, how to negotiate and what to realistically expect.
Don’t expect the moon and the stars
When searching for a mortgage, we see the borrower asking for everything including the kitchen sink. Rock bottom interest rates, free redraws, no application fees, Internet banking and 24/7 customer support all come at an expense to the lender. The average cost to lenders is about $1,000 when setting up a new mortgage for clients, so unless lending large sums of money ($500,000+) don’t expect too much wiggle room on certain aspects of the loan.
Borrowers need to think logically when comparing loans between lenders to have room for negotiations. For example, asking banks to match rates from a lender in another state that offers no realistic banking features (due to location) is pretty pointless and negotiations can often hit a brick wall. However, if location or in-branch features are not deemed important to the borrower, then happily compare the two lenders together.
The bigger the lender, the bigger the discount
Smaller banks and lenders are known as ‘intermediaries’ or the ‘middle man’. As a consequence, some will not have the ability to lower their interests rates regardless of what other lenders offer, it’s company policy. Smaller lenders typically have greater costs resulting in borrowers having less bargaining power. As the subheading reads, the bigger the lender, the bigger the discount (usually).
Offer the ultimatum
Borrowers should know by now that just because they have been with their bank for decades, doesn’t mean they are entitled to extra services, special discounts or anything else of this sort. Winning new customers for banks is a difficult process and very costly, most would much rather waive a few fees than to lose a customer forever. Knowing this key piece of information, borrowers should take advantage and threaten to leave for another lender if they cannot match or offer a better deal.
What we don’t suggest is to carelessly throw the idea of leaving unless you’re genuinely serious about it, as banks may sometimes call the bluff. Borrowers who are happy with their current lender because they provide great support, features and a fantastic service should recognise these services cost a bit more money and other low-cost lenders may fall short.
Note: Unbeknown to some, earnings for a lot of people in the mortgage industry are directly correlated to the number of new mortgages they can setup. Whether seeking advice from mortgage brokers or other lenders, be upfront and honest. Tell them you will shop around and even try and squeeze your current lender to get a better deal. It’s not the nicest thing to tell someone you’re going to leave your bank and go somewhere else hoping to secure a better deal, as they may think they will be getting a new client.
Don’t act like a bull in a china shop and understand that all lenders have a set of guidelines they must work within. Certain variables such as fees can be waivered but they may have next to no power for reducing interest rates. Borrowers should work with lenders to see what they can offer rather than demand for things outside of their hands. For example, if a lender can only offer a discount of 0.60% (because it’s capped) ask them to waive the annual package fees for 2-3 years instead.
The truth about switching lenders
Many borrowers don’t hide the fact they hate their bank but they still never leave, why? Because they think it’s a huge hassle and usually not worth the time or stress associated with moving. The idea of getting new debit cards, setting up new payment schedules and filling out new forms with their employer sounds like drudgery (and they would be right). However, refinancing can sometimes save borrowers thousands of dollars per year. Most paperwork and filing can be done in a few hours and the time spent to savings made is enormous. Our point: don’t think that moving lender is extremely complicated. If done correctly, it can be done in half a day.
Never lose flexibility
Found the perfect package? Is it flexible? If not, keep on looking. Flexibility is the biggest asset borrowers hold against their lender. If the lender knows a borrower can pick up and go anytime, they will likely offer more incentives. Here are two examples we come across on a regular basis where borrowers have lost their power:
- Bob, after being approved for a loan, asked his lender for an extra discount on top of the existing discount he had already negotiated. The lender rejected his proposal as they knew there were less than 7 days until the loan would be settled, and Bob would not have enough time to find another lender.
- Only a year ago Jane had taken out a fixed-rate loan with her bank. Recently she had a meeting with them and wanted to work out a better deal on her current fixed-rate package. However, her lender rejected the idea. They knew that Jane had no options and would not go elsewhere as the break costs associated with her agreement would set her back tens of thousands.
These are just two cases we come across a lot in our line of work. Borrowers who sign up to the wrong loans can end up having their back up against the corner with nowhere to turn.
Premium products aren’t cheap
Financial products fall under different categories and the more advantageous it is, the more it will cost. For example, a line of credit provides borrowers with much more flexibility than a fixed-rate loan. In turn, lenders will offer fewer discounts. Sometimes it can be worth switching products to get a better deal but beware of any fees associated.
Not in the sense that borrowers should go out and buy the latest clothes and get the newest designer haircut, but to make lenders realise the value they hold as a customer. Offering the bank all insurance (car, healthcare, house) business in return for greater discounts is one way to get the ball rolling. Borrowers who won’t require the use of branches or other features should make it clear during negotiations, as the fewer requirements a borrower needs, the cheaper they are to maintain.
There’s an old saying that goes like this: if you don’t buy a ticket, you can’t win the raffle. In a nutshell, if borrowers aren’t asking lenders for discounts ever year or two, they simply won’t get anything. Don’t be shy in asking these questions as the worst response will be ‘no’. And who knows, a simple inquiry can save hundreds or thousands off mortgage repayments.
To sum up, the main components to finding a competitive deal is to remain flexible, research and negotiate with what lender can offer. Now is a great time to find the best deals and if you’re struggling to find something tasty, feel free to give us a call or drop an email. We are more than happy to point you in the right direction with our years of experience.