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How to get the full rate cut on your mortgage

Nicole Pedersen-McKinnon

About $10 a month and $120 a year doesn’t seem much to miss out on. It hurts a little more when you realise that’s $2811 over the life of a 25-year, $300,000 home loan; and a further $2400 if you’d stuck with the higher payments you’re used to making.

But it’s downright painful to consider that’s the result of the big banks hoarding just 0.05 points of one interest rate cut. Over the past five years to late 2012, they’ve withheld a third of all official cuts – and added a bit extra on to hikes for good measure.

Clawback controversy

As debate once again rages about whether the clawback is justified, you can actually put a stop to this. There are five ways to secure the rate cut you deserve.

1. Apply for what they deliver

First, while a rate cut will be automatically passed through to your loan – when, eventually, it kicks in – you need to apply if you want your direct-debit repayment reduced.

This is to the banks’ credit as it means, all of a sudden, you are overpaying, which will save you significant interest in the long run. If you hold a $300,000 loan on an average variable rate of 6.42 per cent that’s an additional saving of $16,613, and you’ll be debt free more than a year early.

But if instead you want the monthly cash in hand, you’ll have to put up your hand.

2. Ask for the full whack

OK, they may well laugh, but the sound will die in their throats if you reveal you know about the generous discounts they offer to select customers.

The fact is big-bank headline rates are no more than a starting point. You have bargaining power if you have a good credit history and/or are a long-standing customer, and your borrowings amount to more than, say, $250,000. Authorised discounts could be as high as a full percentage point, which puts big-bank rates much closer to the most competitive in the market.

Those lenders that appear at the top of interest-rate league tables, often non-banks, will have far less wriggle room.

3. Threaten to leave

Be prepared to lend weight to your request by making a genuine threat to leave.

Banks know that the ban on exit fees on loans taken out since July 1, 2011, and the requirement that those on older loans are fair and reflect only the revenue loss to the bank, give you mortgage mobility like never before. And your lender knows it.

What’s more, many rival institutions will happily waive any set-up fees to get your business across.

But you may not even have to bother. This could well be the bargaining chip that secures you a much better rate exactly where you are, with not a jot of extra effort.

4. Actually switch

If your lender doesn’t acquiesce, no matter – you should garner an even bigger discount by ditching and switching.

Remember, whatever individual lenders do with their rates each time, the gap between the big banks’ average variable rate and the best rates on the market has stayed at about 1 percentage point for years now – that’s not one but four rate cuts.

(Just be aware there are no assurances the cheapest lenders will maintain that margin, and funding difficulties may see them pass on less. Make sure the initial pricing is worth it.)

At December 2012 rates, improving your deal by this much on the big-bank average represents a saving of almost $52,000 on our $300,000 loan.

That’s about an annual wage. Do you think that justifies the bit of paperwork involved?

5. Save even more money

If you’re holding money in a savings account of some kind when you still have a mortgage, stop. You’ll struggle to get up to 5 per cent on deposit today – and from that you’ll lose interest. Put the money against your mortgage, however, and you’ll effectively earn 5.5 per cent or more, tax-free.

So the difference is much more than two rate cuts; there is simply no decision.

The smartest thing to do is not to put your money actually inside the mortgage but to house it alongside it in a linked offset account. The interest saving should be identical but you will retain full, free access. You can also get multiple offsets that allow you to keep your savings, holiday, car, etc., separate.

Don’t be at the mercy of the banks self-serving interest rate repricing, serve yourself an interest rate reprieve.

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