How to get a lower interest rate without refinancing

If you own a home, you have probably heard a thing or two about refinancing to reduce the interest rate on your home loan and tweak the payment plan.

As good as refinancing sounds, there are many reasons why it is not an option for everyone. For instance, it could be that your credit score has gone down due to recently missed payments or defaults, and you know you wouldn't get approved for a new loan. Alternatively you may have lost your job or your business may have taken an unexpected downturn. Let’s explore the alternatives to refinancing your home loan.

Do you actually need to negotiate a better rate?

Many lenders use the RBA cash rate as a base point when setting their interest rates. So, when the RBA changes the cash rate, your bank may change the interest rate on your home loan.

Historically, banks have been less than forthcoming in this regard. Many have dragged their feet when passing on rate cuts, pocketing the margin, while some have failed to pass on rate cuts altogether.

However, a new breed of non-bank lender has entered the market, promising to pass on rate cuts automatically. Athena is a prime example of such a lender, with a proven track record of passing on rate cuts to its customers. If you are with a lender like Athena, you may not need to negotiate a better rate, because it will happen without you having to apply.

Is negotiating a better interest rate possible?

Yes, you can negotiate your home loan interest rate to get a better deal. Your loan won’t be rescinded just because you asked for a better rate, so you really have nothing to lose by trying.

Don’t be put off by an immediate refusal. If you’re prepared to be persistent and logical and argue your case, you have a chance of succeeding. Every percentage point by which you can lower the rate could save you thousands.

How to negotiate a lower rate without refinancing

Use this step-by-step process when negotiating with your lender.

Research the marketplace

Before you approach your lender, compare your interest rate with those currently being advertised. Take note of home loans with a lower rate on offer from a competing bank, or to new customers at your existing bank, and be prepared to quote these figures and supply evidence.

Make yourself more attractive as a customer

Before negotiating, put your financial house in order. Don’t miss any mortgage repayments, pay off as many of your other debts as possible, and improve your credit score so that your profile is less risky.

Calculate the improvement in your loan-to-value ratio since you first took out the loan (as a result of your repayments and probable property market price rises), so that you can point out that the loan is now less risky. If your income has increased, mention that as well.

Contact your bank (not a broker)

Having improved your financial position and with detailed notes from your market research to hand, contact your bank. You can either phone them or meet one of their home loan advisors at a local branch.

Point out other products you have with them

Although the bank may not have been loyal to you by failing to pass on RBA rate cuts, your loyalty to them is worth pointing out, particularly if you have other accounts with them (and they are in good standing).

Make it clear you are serious about switching

If you detect hesitancy from the bank, courteously remind them that you are willing to switch banks in order to get a lower interest rate, transferring whatever other accounts you may have with them too.

Ideas if your request was unsuccessful

It is still possible that your request will be rejected. If this is the situation you find yourself in, here are some actions you can consider instead:

• Apply to set up an offset account. An offset account is a type of bank transaction account that is linked to your home loan. The balance held in the offset account reduces the principal owing on the home loan for the purpose of calculating interest charges, reducing interest payments. Not all banks offer offset accounts, but it’s worth asking.
• Make plans to pay down the principal faster. By making payments every fortnight instead of monthly, you can pay down the principal amount faster, reducing the overall interest cost. While this will save money, it is a long term strategy.
• Look for other ways to reduce costs and save more money. Audit your spending and try to cut back by finding cheaper alternatives for streaming subscriptions, phones, utilities, insurance, meal delivery services, the gym, etc. If you can live without them, then consider cancelling subscriptions altogether, to free up more cash.

Home loans are not set in stone

Although you may have signed up for a loan term of 25 or 30 years, in practice few loans last that long. Many people move house several times during their lives, discharging their mortgage each time and taking out a new one, or transferring an existing loan to a new property. Lenders change their home loan products too, so a better type of loan, with improved features, may become available.

So, it’s okay to tinker with your loan, especially if it’s going to result in a cost saving. It can be done without refinancing.