After three consecutive interest rate hikes, mortgage holders are being squeezed.
If you are seeking a better interest rate, it’s time to push your lender to reveal their “edge of cliff” price to keep you as a customer.
Here’s what to do.
Mortgage retention trigger
A couple of years ago, banks were jostling for mortgage market share, making it relatively easy for borrowers to secure a significant saving – usually about half a percentage point, equal to two standard rate cuts – by simply asking for a better deal.
That process has become harder, with many lenders now less willing to offer good deals as they prioritise profitability over market share.
While asking a lender for a better rate is still a good first step, mortgage holders will probably need to be more strategic to secure a reduced rate.
The chief executive at the broking group Finspo, Angus Gilfillan, says borrowers need to find their lender’s “edge of cliff” retention price, and be ready to change institutions if necessary.
“That’s often the time they will come out with their best price,” says Gilfillan.
“What we are seeing now is that customers need to be more informed, and, compared with a couple of years ago, need to cast their net a lot wider to get the cheapest price possible.”
To get the cheapest rate, a borrower should first line up a more competitive rate from a rival lender, and then submit their discharge form with their current bank.
This typically sparks the lender into action, triggering a call from their retention team offering their most competitive rate because they now know they are at real risk of losing a customer.
Property equity position
There are some steps to consider before lodging a discharge form, such as organising a home valuation.
If a property has gone up in value, the owner’s equity will have also risen, making them a more attractive customer.
For example, if a buyer had the typical 20% equity when they bought, but now have 30%, they are seen as a safer borrower and likely deserving of a better rate. The same goes for someone moving from 30% equity to 40%, and so on.
Gilfillan says that while most lenders aren’t clamouring to offer mortgage holders deep discounts like they were in 2023, there are lenders that will fight for new business.
“There’s always a lender somewhere in growth mode and it’s not always the big four,” he says, referring to Australia’s four biggest retail banks.
Fees attached to switching loans usually cost a borrower just over $1,000, which needs to be taken into account.
Mortgages with cash back offers
While many lenders withdrew their cash offers for new mortgage customers in 2023, there are still several in the market, most of which are offered by smaller lenders.
They typically range from $2,000 to $4,000, according to Canstar data, and vary depending on loan size, so long as the borrower meets various conditions such as having at least 20% equity.
Canstar’s data insights director, Sally Tindall, says cash back offers are worth considering as long as the new loan is competitive.
“It can work in someone’s favour if it comes attached with low fees and a competitive interest rate,” says Tindall.
“The bigger your debt is, the more important the interest rate is.”
Many owner-occupiers are paying in excess of 6% on their variable mortgage rate, even before Tuesday’s quarter percentage point rise is added.
Tindall says homeowners should be able to secure a loan well under that rate as long as they are willing to switch lenders.
“We estimate, even after the rate hike takes effect, a competitive rate for an owner-occupier will still start with a five, but you may have to switch to a lender that you haven’t heard of before,” says Tindall.
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