The RBA’s rates cut means you could be getting a better deal from your bank
If there’s one thing you should do for your personal finances this week, it’s call your bank and ask for a better deal on your mortgage interest rate.
Why? Well, you’ve probably heard the Reserve Bank of Australia has cut the official interest rates to a record low of 0.1 per cent.
But did you know lenders won’t all automatically pass on that rate cut to you?
It matters, because a small move in your interest rate can add up to big dollars over the long term.
So it’s worth it to negotiate a better deal.
In fact, I did just that only yesterday, and I was very surprised by the results.
So, where should you start?
The whole thing from start to finish only took me about 20 minutes.
I started with a quick online search to find out what deals other banks and credit unions were offering.
Make sure you’re looking at the comparison rate, which includes the interest rate and other fees and charges relating to the loan.
The banks’ customer service people often ask you what other deals you’ve noticed, so it’s worthwhile having a response ready for them.
Of course, have a look for what deals your current bank is offering too — what they’ve announced since the RBA’s cut and also what rates they’re currently offering new customers (in case that’s better than what you’re on right now).
And then double check what the interest rate on your current loan is.
Mine was a variable loan with a rate of 3 per cent (better than some advertised rates but not the lowest around).
Next step: Making the call
Okay, now it’s time to psych yourself up, find out your lender’s number and make the call.
Don’t necessarily be put off by wait times, either. When I called my lender, I was told there would be a 45-minute wait, but in just two minutes my call was answered.
If you’re a shy person or don’t know what to ask, feel free to use my script:
“Hi. I noticed the RBA cut rates again this week. I was hoping you could offer me a better rate on my loan please.”
Immediately the customer service representative asked me which other lenders I’d been looking at and thanked me for giving them the opportunity to keep my business.
After a very short time on hold, she came back with their best offer: 2.87 per cent.
Not bad (that’s 13 basis points, almost the 15 basis points the RBA cut) but as far as I was concerned, not quite good enough.
I thought I’d give my negotiation skills a little bit more of a workout and ask if they come could down a bit more.
Again, the customer service representative put me on hold for a minute and came back with a lower number: 2.77 per cent.
That’s a full 0.23 per cent less — a great result!
It’s still not the lowest on the market (for instance, some online lenders have lower rates on offer) but my current lender is convenient for me.
It doesn’t sound like much, but, depending on the size of your loan, it can add up significantly, especially if you’ve got years left on your home loan.
Now for the fun part: working out how much you’ve saved
For instance, here’s a back-of-the-envelope calculation, which doesn’t cover everything that a lender takes into account.
Here’s a very basic example of how the savings might add up:
|Loan amount||Annual cost at 3% rate (this is just a rough calculation)||Annual cost at 2.77%||Saving in just 1 year|
Or check out the Moneysmart Mortgage Switching Calculator, which allows you to more accurately check out potential savings across the lifetime of your loan.
But if I wanted a lower rate, I could have fixed my loan
None of the big four banks have passed on any rate cuts on variable loans (where the interest rate goes up and down) or for investment loans.
But they’ve all announced significant cuts on fixed rates — getting them under 2 per cent for the first time.
It’s all because the RBA took some action on Tuesday to provide certainty to banks around their own funding costs for several years.
This in turn, allows them to offer more attractive fixed rates.
But what exactly does ‘fixing your loan’ mean, you ask?
That’s where you lock in a rate for a set period of years.
Fixed rates give you certainty, but it may mean you may not be able to make many extra repayments.
Most of these don’t have an offset account and there may be hefty break fees if you need to get out of the loan early.
My lender isn’t playing ball. What can I do?
Don’t forget, you can always switch banks.
The RBA Governor even urged people to do this if their bank didn’t pass on the interest rate cut.
In fact, it should be easier than ever, before because from this month our mortgage and personal loan information can be more easily shared with other financial institutions (through an Open Banking scheme).
It’s supposed to increase competition and make it easier to switch.
It’s important to realise that it’s not all about the interest rate, though. Mortgage features like offset accounts, redraw or line of credit facilities can come at a higher cost, so think about what’s right for your situation.
And be aware of terms and conditions — it might be a ‘honeymoon rate’ that only lasts a short time before reverting to a higher one, or you may need a large amount of equity in your home to be eligible.
Before you move, double-check any fees you might be up for
While exit fees were abolished almost 10 years ago, if you took out your home loan prior to this date, you could still be charged.
And also make sure you’re aware of any break fees if you’re moving a fixed loan.
There could also be application fees with your new bank.
Finally, check the length of your new loan — some lenders may insist you take out a typical term of 25-30 years instead of the time you had left on your previous mortgage (which could mean you end up paying more interest in the long term).
Aside from this, your new bank should do most of the leg work to get your loans across.
Remember, not everyone is aware of their options or feels comfortable asking for a reduced rate.
And not every lender will give you a discounted rate (it all depends on your individual circumstances).
But it pays to go out on a limb and ask.
For me, the interest rate cut I negotiated will add up to thousands in savings over the remaining life of my loan.
For just 20 minutes’ on the phone — it was worth it.
DISCLAIMER: This is just general information. If you need individual advice please see a professional.
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