No one likes to pay more interest on their mortgage than they have to.
In fact, if you manage to reduce your home loan in a small way via a discounted interest rate, it can have big positive financial consequences in the years ahead.
When homebuyers and investors start out on their property journeys, they can sometimes feel a little at sea when it comes to mortgages.
That’s because there are a huge number of mortgage products in the market, which offer different things – including interest rate discounts – for different people.
The key, of course, is to understand what’s available and which one is right for you.
Well, that’s where we can help!
What’s the difference between high and low risk?
When applying for a home loan, lenders will calculate whether you are high or low risk.
While that does sound a bit harsh, it’s important to understand that banks are generally not loaning you a small amount of money so they need to investigate whether you are a safe bet or not.
When it comes to assessing your risk rating, banks will generally look into a number of your financial and lifestyle attributes such as:
Of course, your income pays a key role in your desirability to banks so it’s always a good idea to ask for that pay rise or perhaps earn additional income via a second job.
Jumping from one job to another might seem like a good idea when you’re young and carefree, but banks actually want to see security of employment such as staying with one employer for a number of years or working within the same industry for a period of time.
Credit card limits
Many first homebuyers don’t understand that when assessing your loan application, banks actually use the total of your credit card limits and not the balances. Of course, while it’s always a good idea to pay off your credit cards every month, it’s also wise to have low credit card limits to improve your financial standing with lenders.
The currency of credit card payments
Banks will also take your credit card payments into consideration so make sure you don’t miss any.
The reliability of other repayments
Banks actually like to see borrowers who use credit but who are diligent with their repayments. So, if you do use credit, make sure you pay it back before it costs you in more ways than just the interest component. This also extends to utility bills such as your phone or electricity etc. Late payments or defaults on these will have a detrimental impact to you.
Your deposit or contribution towards the purchase
The more you contribute, the lesser risk you are to a bank. Conversely, if you are seeking a loan at 95% LVR (Loan to Value ratio) and putting in less, then the bank carries more risk. As a rule, all lenders like you to contribute a 20% deposit plus the purchasing costs (i.e. stamp duties, registration costs, solictors/conveyancers fees, buyers agents fee etc., to name a few).
Your net worth
Like all businesses, banks want to do business with the very best customers and they’re generally the ones who are classified as low-risk but actually have high debt which is used for investment purposes.
The thing is their debt levels are not concerning to banks because these types of customers are generally high income earners in respected professions who also have great credit histories. What’s not to love, right?
Which professions are eligible for interest rate discounts?
When it comes to mortgages, they’re not created equally for everyone. That’s because banks use specific criteria to assess customers, including their professions.
Some high profile professions can even attract reduced home loans because they’re classified by the banks as being fairly low-risk when it comes to job security while also having the opportunity to earn high incomes.
These professions can include:
- Legal professionals
- Doctors, dentists, vets, optometrists, and pharmacists.
- Mining engineers
- Professional athletes
- Other high income professionals
So if one of these professions sounds like you, or you are a high income earner, lenders will likely be most responsive to offering an interest discount to you.
Normally with a standard professional package you may qualify for a discount of up to 1.0% below the Bank Standard Variable Rate (BSV) without any negotiation.
Even if you’re not employed in one of these professions, it’s always a good idea to negotiate for a better deal because the banking sector is a competitive marketplace. Everyone is eligible for a discount, it’s just a matter of knowing with who and what’s available. That’s where a great finance broker can really assist you.
If you don’t ask for a reduced home loan, you could be missing out on savings in the order of tens of thousands of dollars over the life of the loan.
One little misconception people make is to take a 1 year or honeymoon deal. These tend to have a very low (and we mean very low) 1st year rate but then from there on, they are quite expensive. They are a lure if you will to the unsuspecting buyer.
We’d much prefer our clients secure an interest rate discount for the life of the loan than a 1 or 2 year deal.
Interest rates aren’t your only negotiable discount
Interest rate discounts on your home loan may be the nirvana of mortgages but there are other ways that you can secure a better deal.
The creation, and eventual discharge, of a mortgage comes with a variety of fees and charges that you can negotiate with your lender.
Remember, that banks are businesses that want to do business, so it’s never a bad idea to ask for the best deal possible.
You should consider negotiating discounts on:
Break fees are often charged by lenders when a borrower refinances to a different bank during a fixed rate period. These can be quite high depending on the length of time left on the loan.
An application fee is a one-off payment when you start your loan. If you are not charged an establishment fee, you may pay higher ongoing fees, but you may be able to negotiate this fee.
Early exit fees
Also called ‘early termination’, ‘deferred establishment’, ‘deferred application’ or ‘early discharge’ fees. These may be charged if you pay out your home loan in full early, within a specified period (for example, in the first five years).
Here’s the thing: after you’ve got a home loan it can be easy to simply get used to it.
What we mean by that is that you start making your repayments, or your tenants pay their rent to help pay off your investment properties, and before you know it it’s 10 years since you established the home loan in the first place.
There hasn’t been any major ups and downs in your life over that past decade so you’ve carried on making the repayments without so much as a second glance.
The problem is that, for banks, that makes you the very best kind of customer because you haven’t asked for a better deal in all of those years.
You may have been eligible for a reduced home loan, which could shave years off the life of the loan, but you never got around to even asking the question.
Ideally, you should review your mortgages annually to ensure you are getting the best deal.
If your lender isn’t prepared to come to the discount party, well, an option is to refinance to another bank that actually wants your business.
As the saying (kind of) goes, there’s always more than one way to pay off a mortgage!
Article written by Andrew Mirams, Managing Director at Intuitive Finance
The information provided in this article is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs.