How I got a 0.6 percentage point mortgage rate cut … and you can too
Let me be very clear on this: if you ever want another mortgage interest rate cut, you’re probably going to have to do some work to get it yourself.
It’s impossible to overstate how dramatically the mortgage landscape has changed in recent years.
There was a time when the big banks would obediently pass on official interest rate cuts from the Reserve Bank of Australia – in neat, little bundles of 25 basis points – to all their existing variable rate customers, albeit sometimes keeping a little slice for their shareholders.
That has changed.Advertisement
With the official cash rate now as close to zero as it can go, there is no more room for rate reductions linked to the cash rate. Game over for mortgage interest rate cuts? No. Far from it.
While the banks have cried poor this week, refusing to pass on rate reductions for existing variable rate customers, don’t let them fool you.
Their cost of funding is going down. Big time. Banks’ funding priced against the cash rate makes up just a portion of their total funding costs. The rest is determined by what they have to pay depositors and what they pay for short and long-term borrowing on wholesale markets.
It’s true banks have run out of room to screw down deposit rates much further. However, the funding relief they are enjoying in wholesale markets is massive, thanks to our central bank pumping hundreds of billions of dollars into these markets.
So, don’t believe the banks when they say they cannot cut variable interest rates for existing customers. They definitely can but are just making a business decision not to do so.
Our banks have decided over the past few years to dud their existing customers, offering rate reductions only to new customers in a bid to win business – or to existing customers who wake up to the scam and ask for a cut.
For new borrowers, there are offers galore. Fixed interest rates with a “1” in front. Cash-back offers of up to $4000. Massive discounts off standard variable rates.
The banks are falling all over themselves to lure attractive borrowers – those with stable incomes or low loan-to-valuation ratios on home mortgages. However, if you are an existing variable rate borrower and you want a cut, you are going to have to work for it.
There are three main ways to do so and here is your new mortgage motto: ask, walk or fix.
First, ask. Call your lender. Say you have heard that rates have come down and you are thinking of refinancing with another lender.
If they won’t budge, try door No. 2: go to a lender who can offer a lower variable rate, after fees and charges.
You can use a mortgage broker if you like, or simply consult one of the numerous comparison websites, such as Canstar, Finder, RateCity or Compare The Market. But beware: these sites often display only a small selection of the products available.
And often it is possible to know the true rate you will pay with a lender only after you approach them directly and they reveal what discount off their headline standard variable rate they will give you. Yep, advertised headline standard variable rates are meaningless these days. It’s all about the discount.
On my existing loan, I had a discount of 1.7 percentage points off the headline rate. That was nice but not quite nice enough.
After Wednesday’s RBA rate cut announcement, I decided to call my lender and ask for a bigger discount off my variable mortgage rate of 2.69 per cent.
Unfortunately, that was as low as they would go. And from my survey of websites and friends, I knew 2.69 per cent was a pretty good variable rate for a borrower like me on close to 80 per cent LVR. (If you have a less than 60 per cent LVR, you can get a variable rate closer to 2 per cent … go on, try!)
So, I moved on to strategy No. 3 and inquired about the fixed rate mortgages available.
There are some great fixed rate deals at the moment – loans that allow you to lock in the interest rate you will pay over a certain period. That’s because the RBA is providing unprecedented certainty about bank funding costs over three years and longer. Because of that, fixed rates today are generally lower than variable rates.
Of course, there are disadvantages to fixing your rate. There can be big penalties for breaking the loan term early. Lots of fixed rate loans also do not offer a mortgage offset account that allows you to use any savings to offset your amount owing dollar for dollar, reducing the interest payable. Then, there is always the risk you would fix at a rate that turns out to be too high, if rates fall further in the future.
However, fixing is exactly what I did this week.
Six months ago, I did something similar, fixing the rate on $300,000 of my $700,000-ish loan at 2.19 per cent for two years. I have been reaping the savings ever since.
This week, I fixed in the rest — about $400,000 – at a rate of 2.09 per cent for one year. I did it only because it turns out that my lender was happy to offer an offset account against a one-year fixed loan (although not for their longer term fixed rates).
So, instead of paying 2.69 per cent on part of my loan, I now pay 2.09 per cent. That is an annual saving of about $2600. Instead of paying about $31 in interest a day on that part of my loan, I’ll now pay about $25 a day.
It’s a 60-basis-point rate cut. And all it took was an hour on the phone and a leap of faith.
Now it’s your turn. Rates are low and staying that way. It’s time to go grab your slice of the savings on offer.