For real. Like legit. No, we’re not going to ask you to sign up to our $997 course. No, we don’t need your email. No, you don’t have to busk in a tunnel. No, you don’t even have to mail us a Maxibon but if you do pull this last one off and it’s still in edible tact then we would be very, very grateful. Enough ramble Madam/Sir, how does one do this!? Ok! We’re going to lay this out step-by-step herein, but you need two things for this to work. If you don’t then bookmark this for another day.
Condition number 1 is you need a mortgage. Condition number 2 is that you have not refinanced your home recently. Ah! You may have guessed it now. We’re going to teach you the practical way to refinance your home loan in Australia. From the quick research we undertake to the scripts we use when calling our warm and friendly banks. If you already know how then we hope this treats you as a prompt to check if it’s time to refinance to save you some cash and/or provides some new tips to help you get more out of it. If this is new to you then even better; read on for our step by step guide on how you can reduce how much interest you pay on your home loan.
How much can YOU save?
Well that depends on two variables dear friend. Firstly, how big is your home loan? And lastly, what interest rate are you paying now? “Don’t answer my question with more questions”, you say. “How did you come up with the $3,640 Big Australian Bucks, Mr. Clickbait”, you ask? Simple maths my dear, dear friend. The average mortgage value in NSW is $455,000 and if we assume a person has not refinanced their home loan in a while and is paying, say 4.50% every year on this loan then they’re missing out on some free money in the current low interest rate environment. This person could be paying as low as 3.70% per annum (assuming the loan is not for an investment property).
So, assuming no other fees, this is what this person would be paying to their lender in interest every year:
Before:
$455,000 x 4.50% = $20,475
After:
$16,835 x 3.70% = $16,835
Savings:
$20,475 minus $16,835 = $3,640
We’re going to assume you don’t have a horrible credit score so the key variable as to how much you can save depends primarily on how big your mortgage is. If you have a loan of $800,000 then that’s a saving of $6,400. If you have a smaller loan of $300,000 then that’s a saving of $2,400. Also, we’re hoping you’re not one of those people that has fixed all or most of your interest because that would just throw this into disarray.
Yes, we understand we’re currently in a low interest rate environment in 2019. But the value to be gained here is simply because there’s always some fat built into your variable rate home loan if you haven’t refinanced it in a while.
Ok, now that we have that out of the way, let’s go through how you can get this done.
Step 1: Calculate How Much You Can Save
If you’ve recently secured your mortgage at a sweet rate or in a really weird case your bank hasn’t increased your rate by much and passed on the rate cuts in full, then it may not be worth your time to go through the process. So, the first step is to check if it’s worth your while. Don’t worry it’s quick.
Open up your mortgage bank statement. Somewhere on the page, you’ll find the annual interest rate you’re currently paying. Note this down. Here’s an example taken from an active personal home loan (interest rate circled in red):
Now, open up Google and search “finder mortgage rates”. As at the time of writing this, we’ve found that finder.com.au provides the best comparison of rates out there. We have no affiliation and as times change, we may update this if needed. You can also just search Australian mortgage rates but just be wary that some sites have arrangements with banks and only present selective rates to you which will likely be higher than what’s achievable. Let’s continue with Finder as an example:
- Make sure your borrowing / loan amount is the same as your current loan. We want this to be a like-for-like comparison to your current home loan and the amount borrowed can impact the interest rate you receive.
- Likewise, make sure the loan period is the same.
- Hit calculate and now you’ve got an array of options.
- Now sort by Comparison Rate. Why Comparison Rate and not Interest Rate? Because we live in the heavily regulated market of Australia and receive some protection from our robust laws and regulations. Lenders in Australia are required to publish a Comparison Rate which is effectively the interest rate you pay plus other costs and fees.
- Look at all those juicy choices! Eyeball some of those rates. How do they compare with what you’re currently paying? Following how we calculated it earlier, is the amount you can save worth a few phone calls? When running this calculation please bear in mind any application and ongoing fees and be sure to deduct these from your savings. Also, if you’re switching banks / lenders then you’ll have to factor in mortgage discharge costs and potential break fees. We’ll go through these later and how to account for them or hopefully avoid them altogether.
Step 2: Preparation
Competition is a great thing. With all the choices out there for lenders, you become a prize if you have a decent track record of on time mortgage payments and can demonstrate healthy personal finance. That doesn’t mean you can get away with putting in zero effort. A little preparation will go a long way when you’re one of the most attractive people in this field. Also, we want to make this as easy and seamless as possible, so our primary goal is to get our existing lender to give us a big fat juicy discount. Failing this then we need to make a call whether it’s worth going through a whole set of paperwork and time needed to process a mortgage with another lender.
So, what do you need to prepare? Three things, oh and you’ve already done most of the heavy lifting for item 1 (details of your current loan), isn’t that a nice surprise!
- Details of your current loan (the loan amount and interest rate from your bank statement before).
- Getting your fees right. The biggest ones are any break / early termination fees for your current home loan. (this is a dollar amount you must pay for ending the contract with your current bank), and registration fees you have to pay to discharge and register a mortgage with another bank.
Your break fees can be found in your original loan documents. If you can’t find them or you’re not sure where to look in the contract, don’t worry you can simply call your current home loan bank and ask.
The registration fees can be found published on the websites of your State’s land titles office. For example, the discharge and registration of mortgage fees for NSW are published here:
https://www.nswlrs.com.au/Fees
There are a host of fees associated with setting up a mortgage with another bank. These can range from application fees to settlement, valuation, title search and preparation fees. However, we’ve found that these usually come with larger institutions offering tack-on products that we don’t really need. As such our focus is to ask them clearly to identify that there are zero upfront fees or waive as much as they can before we sign up. Also, if you have less than 20% equity in your property, your new financial institution may charge you lenders mortgage insurance. But these are unique situations and beyond the scope of this quick guide.
- The comparison rates you found on Finder from Step 1.
Now open up an excel spreadsheet. Don’t worry, I’m not going to bombard you with some crazy index-match formulae. The goal here is to have everything laid out in clean form so you can make some quick decisions. Draw up a table on paper and use a good old-fashioned calculator or basic math if you don’t want / have excel.
We’re going to take all that information you gathered and arrange it like so:
Alright, what’s going on here. Well, in Step 1, you had the chance to eyeball some of those juicy rates that are being offered by other banks. That doesn’t mean that’s exactly what you can secure because you need to factor in fees which gets you to your true dollars saved. With me? Ok so, following from this, in this example situation we’ve assumed the following:
- The loan amount is $455,000 as before.
- The current interest rate is 4.50% per annum.
- The break fee is a one-off payment of $350,
- The fees payable to discharge and register a new mortgage are taken from the latest NSW registration prices and total $288.
Now that you’ve clearly laid out the interest rates for the lenders you’ve found in Step 1, you have a clear picture of what your net / total savings are depending on the interest rate per lender. So, for example, assuming no other fees, switching to Bank D would reduce your interest rate to 3.79%, saving you $2,594 after deducting break ($350) and registration ($287) fees.
We’ve entered a line called “Existing bank offer” to later help with Step 3 which we’ll explain now.
Step 3: Calling Your Existing Bank
Let’s bring this all together. In all likelihood you’re going to be calling them twice so don’t freak out and think that you have to have everything sorted on the first call. In fact, the first call is really to confirm the break fee if you don’t know it and a preliminary quote as to how much they can lower your current interest rate. Pick up the phone, dial and navigate to the home loan department and your call will likely flow like so:
Brian: XYZ Bank, this is Brian, can I start with your name please?
You: Hi Brian, my name’s Jon Snow, how are you?
Brian: Well thanks Jon, yourself?
You: Great, Brian I’m calling to speak about my mortgage with ABC Bank. I’ve had my mortgage with you guys for [insert however long you’ve been with them] now. It’s gone well but I’ve recently noticed that the variable rate has increased to above market. Are you able to help bring this down to a competitive rate again please?
Brian will then ask for your personal details for verification and either give you an initial quote for a lower interest rate or pass you on to someone else that can. He’ll then proceed to kindly offer you the ability to lock this in for you immediately which is when you reply with:
“Thanks Brian, that’s still coming in a bit above a few of the other quotes I have. Can you do any better?”
That’s it, don’t waffle and stay silent until Brian replies with either:
-
I’ll have to run it up to the credit team to see if we can give you a better rate.
In which case you leave your details and ask for an estimated time by which he can get back to you and wait; or
-
Sorry that’s the best he can do.
In which case you thank him and say that you’ll take it away for consideration.
Sweet! You now have an offer for a lower interest rate and don’t worry about not locking it in on that first call. The offer is most probably going to still be there in a week. It’s not like crawling back to your ex. Most likely when you call again, you’ll talk to another staff member of the bank who has little vested interest in your previous conversation unless prompted.
Whether it was via path a) or b), let’s say that the final rate your existing bank can offer you is 3.89%. Open that spreadsheet we assembled in Step 2 and plug this figure into the “Existing bank offer” line. Congratulations! You’ve just saved $2,776 in our mini case study.
How does this compare to some of the other offers out there?
You may be thinking, “Wait, 3.89% is higher than some of the other rates I’ve found... Even in your example, Bank D is offering 3.79%”. Great observation. But remember, our goal here is to save you a large chunk of money with only a little bit of time and effort required on your part. So, in our example, which by the way is largely based on a true story (no names provided to protect the innocent and … the guilty), $2,776 was saved by a little bit of Googling, typing some numbers in a spreadsheet and making 2 calls; all of which we estimate to have consumed 30 active minutes (depending on how long you have to wait on the calls to your bank / lender). Not bad if you flip that around as being paid $5,552 per hour; almost like a barrister (Ok yes, it’s not paid as a lump sum but hey, a solid amount for the effort)!
However, what’s the value of pushing beyond this? The value of the extra 0.10% saving from 3.89% to 3.79% is worth $182. Considering you pay home loan interest every month that’s just over $15 per month saved. Umm… we’re all for frugality but in order to save this incremental amount you have to switch banks. And switching banks takes at best at least 1 month. In this month, prior to switching you’ll likely be paying your current exorbitant 4.50%. Again, this assumes there are no upfront and additional fees that you would have to pay to setup your mortgage with a new bank.
The other major point to consider is that you’ll have to go through the whole vetting process again with the new bank / lender. This means gathering your PAYG documents, estimating your spending habits and possibly providing bank statements for the new lender to probe and assess your ability to pay. In our honest opinion, this headache is not worth the $15 per month. You have better ways to spend your time. Take the reduced rate from your current bank and move on with your life.
One thing to note is that in offering you a lower rate, your current bank may require that you keep your overall principal plus interest payments the same. This means that they will reduce the interest charged but increase the principal amount you pay. If your financial situation is pretty much the same, if not improving, there’s not much harm in this in that the increase in principal effectively goes to paying down your debt faster. But it’s a call you’ll have to make noting your personal financial circumstance and your foreseeable cash needs looking forward in the short to medium term.
Now, what if the option of Bank H, as in our example, offering 3.39% compared to your 3.89% is available? Well that’s a difference of $1,638. Or what if your existing bank is just plain tight and hasn’t offered you any reduction of value or at all?
Step 4: So, Your Bank is Nasty, Now What?
Well, now it’s time to move and switch banks. A couple of precautions before you move ahead:
- This can be some pretty time consuming and probing stuff. Mostly as it requires you to administratively collect and prepare documentation and estimate your spending habits.
- There may be a host of other fees when signing up to a mortgage with another bank. So be sure to ask the new potential bank or lender to spell out all fees for you.
A lot of the lowest rates we previously spotted on Finder have made it easier to apply directly online yourself and at your own pace. Today, it’s more simplified than it used to be and having applied for a home loan refinance this way ourselves, is definitely a relatively easy option if you’re capable of using Google. However, if you’re feeling anxious and very unsure about it all, we’d recommend speaking with a discount mortgage broker.
There are a handful of these mortgage brokers out there that will take their fee from lenders rather than have you pay directly out-of-pocket. Just note that you will still have to collect your personal information such as income, expenses and assets as the ultimate lender still need to assess your ability to repay your loan. As for the rates the mortgage brokers offer you, it may be a bit higher than those we found earlier but you can shop around and remember to plug the figures into the calculator we walked through earlier to see how much you’re actually saving.
Now we hope we haven’t prepared the above in vain and you take some action now to save you some of your moolah! Remember that the sooner you get onto it, the less time you spend paying your current higher interest rate. And don’t forget to rinse and repeat if rates keep falling.