One of the most common questions we get is; how do I get a lower interest rate on my mortgage?
In this video, Liz Zaki will walk you through the 6 factors that help answer this question.
A quick run-down of the video gives 6 factors that govern how easy it is for you to get a lower interest rate on your mortgage. They all apply equally.
1 – Loan Purpose
Is the mortgage or home loan in question used for your primary place of residence? Or is it used for an investment property?
Investment loans are often more expensive. They are favoured by investors and are usually combined with other tax-advantageous strategies. Loans made to owner-occupiers, on the other hand, are seen as a lower risk for lenders. They have lower arrears and default rates. And as such, they are often priced lower.
2 – Loan Repayment Type
Here, we’re looking at whether you’re paying the loan principle as well as the interest. Or just the interest. Interest Only loans are typically more expensive. Again, they are favoured by investors who are using them with pre-tax income. This gives the banks more leeway to charge more for them.
3 – Loan to Valuation Ratio (LVR)
High LVR loans are a bigger risk as far as lenders are concerned. As such, the higher the LVR generally, the less wiggle room you have to negotiate a discount. If you want to get a better rate, you typically need to borrow less than 80% of the value of the property you are purchasing.
4 – Loan Amount
Generally, the higher the loan amount, the greater the discount you can neg0tiate with the bank. A customer borrowing or looking to borrow more funds is a more valuable customer from the bank’s point of view. As such, they will try to do more to keep you on their books.
There is a trade-off here between how much you are borrowing and the Loan to Valuation Ration (LVR).
5 – Interest Rate Type
Here, we’re looking at variable vs. fixed interest rate loans. Fixed interest rate loans often come with early termination fees. The bank is giving you a discount for taking away the interest rate volatility. In addition, the bank is giving you certainty around your monthly repayments, and in return, they are counting on the interest income from your fixed-rate loan. As such, if you pay that loan back during the fixed interest period, expect to pay some penalties.
Likewise, for the above reason, fixed-rate loan products will not allow you to make additional payments.
6 – Features
Do you need an offset account? Do you need multiple offset accounts? The more features you get, the more fees you will pay.
For more information on this topic, please check out our other video on how the bank calculates your borrowing capacity. It will walk you through the factors that effect how much the bank will lend you.