The Reserve Bank of Australia (RBA) announced at its September meeting that it would not cut interest rates, disappointing many Australian homeowners, who face immense pressure to repay their mortgages amidst the current high interest rate environment. However, aside from simply waiting for delivery, homeowners can negotiate for a rate reduction at any time. A recent report in the Daily Mail shared how a simple phone call could reduce mortgage rates – a must-know for those struggling with mortgage payments.
Over the past two years, the Reserve Bank's continuous interest rate hikes have plunged many families into financial hardship. Some have even chosen to skip meals and gas to avoid paying their mortgages. According to Finder's latest consumer confidence tracker, 421,000 homeowners struggled to pay their mortgages in August, the highest number since the data began tracking in 2019. The survey also revealed that 101,000 respondents skipped meals or essentials to make their mortgage payments, 71,000 missed electricity or credit card bills, and 61,000 even skipped gas.
Graham Cooke, Head of Consumer Research at Finder, said the survey results reflect that mortgage payments consume an excessively high proportion of household income, making it difficult for many families to pay all their monthly bills. For these stressed homeowners, the first step is to ensure their mortgage interest rate is low enough. If the mortgage rate is below the 5-digit range or below the 6-digit range, it means you may be paying too much interest. Experts recommend that homeowners contact their lender to negotiate a lower interest rate, compare offers from other lenders, and consider refinancing if a better option becomes available.
Common borrower misconceptions: the interest rate myth
David Thurmond, a broker at Mortgage Choice, notes that borrowers often mistakenly believe they're getting a preferential interest rate, but most people don't regularly check competing rates. Banks often exploit this lack of interest by offering two different standard variable rates: one at 8.51 T/P/3T and another at a discounted rate of 21 T/P/3T, effectively bringing the effective interest rate down to the 60s.
Mr Thurmond said some borrowers who recently switched from a fixed rate to a variable rate might find their current variable rate is over £71,000 and still think they are getting a good deal. If borrowers understood the difference between £61 and £71,000, they would pay more attention. Even a £0.11 difference in interest rates could save £1,000 per year on a £1 million loan.
Check mortgage rates regularly and try to find discounts
Thurmond recommends checking your current interest rate with your lender every six months, comparing it with other lenders' offers, and then asking your current lender for a better rate. If your interest rate can't be lowered, consider switching mortgages. Last week, he helped a client save £1,700 in annual interest.
Furthermore, as market competition intensifies, banks are more focused on retaining existing customers, but they generally won’t proactively contact you to lower interest rates, which underscores the importance of borrowers taking the initiative.
How to choose mortgage transfer
Refinancing can involve time and fees, so borrowers should ensure the interest savings are sufficient to offset the costs of refinancing. Ask your broker for a breakdown of the costs, Thurmond says. For example, if the fees for moving to another loan product are around £1,500, but you save £0.51 in interest per year, that's £1,3500 saved over three years, making it worthwhile.
Should I choose a fixed interest rate?
Lenders have recently begun lowering their fixed-rate mortgage rates, which may tempt some borrowers to lock in a lower fixed rate. However, Canstar's Director of Data Insights, Sally Tindall, warns that while a fixed rate offers stability, it also risks missing out on future rate cuts. If borrowers decide to lock in a rate, they should carefully compare the fees and terms of various products to avoid paying hefty penalties for premature termination.
Reporter shares practical experience: Just making a phone call can save $3000
Last year, Tim McIntyre himself was faced with a mortgage rate that was too high. He had just finished five years of interest-only payments on his investment property, a loan worth $124,000, and switched to a standard variable mortgage. When he checked his rate, which was $8.131 per 3T, he discovered the bank was offering new customers a rate of just $5.071 per 3T.
So he decided to call the bank and, with the advice of Canstar's Sally Tindall, he made full preparations, including looking into offers from other lenders and being ready to switch mortgages at any time. The call went as follows:
Tim: I want to tell you my mortgage interest rate. It's currently 8.13%, which is too high.
Bank: This is the interest rate for our standard floating product.
Tim: OK, I only paid the interest period before, so should I switch to other floating rate products?
Bank: We have a better basic floating mortgage product with an interest rate of 7.23%.
Tim: But I saw on your official website that the interest rate for investment property loans for new customers is 5.07%.
Bank: This interest rate is only applicable to customers whose loan amount exceeds $150,000.
Tim: OK, so what's the best rate you can offer me? If it's still 7.23%, then I might choose to switch to another bank, because I already have two banks offering an interest rate of 4.99%, and I'm eligible to switch my mortgage to them.
Bank: We can give you a discount of 1.95% on the basis of 7.23%, so your new interest rate will be 5.18%.
Tim: That sounds better, but please also send me a mortgage termination form because I haven't made a final decision on whether to stay or not. I might choose to refinance.
Bank: I don't have the authority to send out mortgage termination forms. I need to transfer your call to another department.
When I got through to the customer retention department, a very friendly employee said they very much wanted me to stay with the bank and reminded me that refinancing would incur some fees, which should be calculated and compared with my new interest rate before making a decision.
After doing the math, I realized it would take more than a year to recoup my investment and refinance costs, and by that time I could probably look for a better mortgage rate. So, staying put made sense for me.
The end result: a 2.98% interest rate reduction! This translates to a monthly savings of $250, a yearly savings of $3000, and a total savings of $60,000 over the 23-year loan term, which is almost half the existing loan amount.
Conclusion: Proactively contacting lenders and negotiating is sometimes more effective than waiting.
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