Should you refinance or negotiate a better home loan rate?

After you’ve held your mortgage for a few years, a question that often comes up is whether to refinance to something better, or to negotiate with your current lender for a better interest rate?

Both options carry their own set of advantages and downsides, so making the right choice is important. Let’s explore the key questions you may want to consider that could determine whether refinancing or negotiating your home loan rate will better suit your goals and needs. 

Refinance or negotiate? What you need to consider

Can you reach your refinancing goal with your current lender?

The needs of borrowers change over time, and you may find that your current lender does not suit your needs or goals anymore, regardless of the rate they may offer you. 

Negotiating with your lender typically only offers you the benefit of lowering your mortgage rate. 

However, homeowners typically refinance for a range of benefits, including:

• Nabbing a lower interest rate
• Paying fewer fees
• Gaining access to helpful features
• Accessing equity in the home
• Consolidating debts

If your circumstances change and your existing home loan no longer suits you, it may be worth considering refinancing to a more competitive option. 

For example, a first home buyer may enter into a basic, no-frills mortgage with the goal of keeping their costs down and building up their equity. After a few years they may want a home loan with helpful features, such as offset accounts or a redraw facility. Or they may want to access some of the equity they’ve built up to pay for renovations. This could mean that a refinance may be on the cards.

However, if you simply want to lower your interest rate, it may be worthwhile getting in touch with your existing lender and negotiating a lower rate. Many lenders will be willing to make certain concessions to their standard home loans and policies if it means you will remain a loyal customer.

Are the switching costs too much?

Depending on the lenders involved, switching home loans can be an expensive process. Some lenders who offer low interest rates charge high fees on their mortgages to compensate, including up-front establishment fees. Also, if your current home loan is on a fixed rate, switching before the fixed period ends may cost you significantly in break fees. 

And if you haven’t had your current loan for long enough to build up a substantial amount of equity, you may not have enough available to serve as a deposit to secure a new loan when refinancing. This would mean that you’d have to pay Lender’s Mortgage Insurance, which can cost tens of thousands of dollars, depending on the property value.

Not only can it cost you in money, but refinancing can also cost you in time and effort. You’ll need to research new lenders, gather your documentation, fill out applications, and undergo credit and property assessments. The whole process can take several weeks to complete. 

Comparatively, calling up your lender and negotiating a lower rate costs you absolutely nothing, and, if successful, could take as little time as your next monthly repayment to come into effect. 

Steps to negotiate a better rate

1. Research the competition

Your first step should be to gather up the details of home loan offers from other lenders to compare against your existing deal. This can show your lender that you’re serious about switching home loans, and help encourage them to make a suitable counter-offer.

2. Research your current lender’s new customer rates 

Many lenders offer low interest rates on new home loans in order to attract new customers. If your current lender is currently offering cheaper or more attractive home loan deals, it can be worth bringing these rates to the negotiating table to see if your continuing business is just as valued as that of a new customer. 

3. Make sure you qualify

Lenders tend to offer their most attractive home loan interest rates to customers that represent the safest financial risks – borrowers with steady incomes, full deposits, and spotless credit histories. It may be worth reviewing your credit scores before you apply to ensure your financial health is where it should be.

4. More value for your money

You may be in a situation where you can afford the repayments on your existing mortgage comfortably enough, but you don’t feel that you’re really getting enough bang for your buck.

Rather than negotiating down the interest rate, find out if your lender would be willing to bundle value-adding extras into your existing home loan package, such as convenient features like offset accounts and redraw facilities.

5. Talk to the right people

When you get in touch with your lender to negotiate a new interest rate, your success could partially depend on who you speak to. For example, the branch manager at your local bank may not have the authority to make drastic changes to your home loan’s terms, at least not without contacting head office first.

If you call your lender and tell them you’re hoping to refinance your home loan, you should be transferred to a customer retention specialist, whose job description is based around keeping customers like yourself happy with the lender’s services. These specialists are more likely to be able to provide incentives to encourage you to stay with the lender, such as making your home loan more affordable or offering greater value for your money.

6. Be realistic

Sometimes a lender simply can’t match what the competition is offering. For example, a large bank may not be capable of providing interest rates as low as some online-only non-bank lenders, as their operating expenses and costs for maintaining their branches are simply too high. 

When using other loans as examples when negotiating, it’s usually best to compare apples with apples, or at least lenders with similar lenders.

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