As the housing market stagnates, competition among lenders will only heat up. Lenders will have to work harder to win over dwindling numbers of borrowers. It follows that borrowers will be in a position to ask for a better deal before they hand over their hard-earned cash.
In short, the tide has turned. The home-lending game is now a buyer"s market, and smart borrowers who are willing to tough it out with their lender can save themselves big bucks.
The good news doesn"t stop there. Our research shows that negotiating a better deal is not just limited to mortgages. In the right situation, you may be able to negotiate favourably with:
• real estate agents
• property inspectors
• some government departments
These opportunities won"t just fall into your lap. You need to demand more. You will frequently be turned down, but a couple of minutes of social discomfort is nothing compared to the financial discomfort brought on by unnecessary years of mortgage repayments.
Always remember: it can"t hurt to ask.
Setting the terms
Successful negotiation is a subtle art, not an extreme sport. Storming into your lender"s office and demanding a 5% home loan with no ongoing fees and charges is not going to get you anywhere. Lenders are professionals and they are in the game to make money. They won"t be swayed by bluster and bullying.
Instead, you should keep in mind that each party to any transaction wants something from the other. Negotiating a loan is no different. You want the lender to give you a good deal. The lender wants you to sign up for their product rather than that of one of their competitors.
The key to a good outcome lies in having your own terms as the focus of conversation. Keep the negotiations focused on whether you will give the lender your business, rather than on whether the lender will give you a loan. This gives you the upper hand from the beginning.
But how do you seize the initiative when talking with a seasoned finance professional who might have sold hundreds of mortgages? Firstly, you need to know your own bargaining position, its advantages and limitations. Secondly, you need to understand the position of the lender and the points at which he or she might be vulnerable to a deal.
What cards are you holding?
Before trying to negotiate a better home loan deal, it"s essential to pause for a little preparation. You need to take a long, hard look at yourself and determine how much your business is worth in the eyes of your lender.
It"s important to establish how much you can afford to borrow based on your present income and expenditure. The Income and Expenditure calculator on Your Mortgage Magazine"s website at www.yourmortgage.com.au will make this easy for you. Borrowing limits can also be worked out on paper if you don"t have internet access.
Begin with your total monthly income. Use the after-tax income of both yourself and your partner/spouse (if applicable), and any regular income you get from term deposits, cash management accounts, share dividends or property investment. This becomes your total monthly income.
The next step is to determine your monthly expenditure. This is a little trickier than determining your income because your cash is likely to go towards a number of different places over the course of a month. Obvious categories of expenditure include food, clothing, electricity, phone, gas, medical, insurance, entertainment, personal, car, transport, childcare, credit cards - the list goes on. Don"t include your current rent if you are purchasing a home to live in. If things go well, you won"t have to pay rent for much longer.
Subtract your total monthly expenses from your total monthly income an ideally you"ll have a healthy, positive number that is roughly what you can afford to repay each month on a loan. However, if the figure you arrive at is suspiciously high, look carefully at your expenses.
If your calculations say you can save $2,000 a month and you have only ever been able to save $1,000, then clearly you have left out a few expenses.
People are creatures of habit. If you haven"t saved before, you are going to find it difficult to save now. Be honest with yourself from the outset. There"s no point in purchasing a house that you can"t afford.
Go window shopping You will have a much greater chance of getting what you want from your lender if you have a solid knowledge of what is being offered in the market. Relatives,friends and acquaintances will happily share experiences of their mortgage shopping and may be able to direct you to a lender with a twistable arm.
Keep an eye on ads in the paper and on TV. Don"t be afraid to ring around to find out more details. This can sometimes be a frustrating or intimidating process butremember that you are the customer that lenders are trying to attract. Have them clarify what they are offering.
Knowing the features being offered by other lenders will put you in a much stronger bargaining position.
Ask thelender that you choose why their loan doesn"t offer the same range of features, low interest rates or low fees as their competitor, Lender X. Listen carefully to their reply. Then ask them to explain why you shouldn"t take your business to Lender X. They might well offer you a better deal.
Up-to-date information on events and trends in the lending market can also give you an advantage in negotiations.
Say a lender, let"s call it Your Mortgage Home Loans, is based in Sydney but making a big push for increased market share in Victoria. Each new Victorian customer it gets will increase its profile in the new area, and is therefore worth a premium to it. For this reason, Your Mortgage Home Loans might be prepared to waive upfront fees to customers in Victoria. If you know that you are important to the lender, you can ask for a better deal.
You"ve done your homework and have a good idea of how much you can afford to borrow and how much the lender will be prepared to give you. You know which institution looks best and also what the others are offering. It"s time to step into the office and start the discussion.
Before you start negotiating with your lender you should know which loan costs will be open to negotiation. Some will be, and some never will be.
1. Lowering interest rates
The interest rate charged on your home loan is the most critical component. Are lenders open to the idea of shaving a percentage point or two off the advertised rate? Officially, the answer is a very loud "No!"
No lender that Your Mortgage Magazine has spoken to will admit to being flexible with interest rates although anecdotal evidence does suggest rate negotiations happen from time to time. We have heard of cases, particularly for fixed interest rate loans, where borrowers can approach their lender and demand that they match a competitor"s fixed rate product - and sometimes save themselves up to half a percentage point interest in the process.
Negotiation of variable interest rate loans can be a little trickier as lenders occasionally drop variable rates to attract new customers and then raise them again once they have attracted a sufficient number. If you thought getting lenders to match competitors" fixed interest rates was difficult, you really don"t want to try doing it for variable rates - unless of course you know any special tricks.
With around 3,000 lending products on the market, it"s nearly impossible to keep track of every loan that is being offered. Lenders continue to add new features, honeymoon rates and an endless array of 'bells and whistles" to their loans. Simply asking your lender of choice if they have any new products or special offers available could result in significant interest savings.
Asking them to check with head office is probably a good idea as well. Loan officers are sometimes the last to hear about special deals. Of course, there"s also Your Mortgage online and Your Mortgage Weekly Newsletter (available through our website www.yourmortgage.com.au) for those borrowers who want the latest information delivered to their screens.
Many professional or industry bodies have arrangements with lenders that allow their members to receive discounts on interest rates. Speak to your union, affiliation or industry group about whether they have any deals going. This can lead to a discount on an interest rate.
Many employers have also been offered discounts by financial institutions with which the company accounts are held. Whether they"ve accepted these discounts, or informed staff that they are available, is another matter.
Ask your employer who they bank with and what offers have been made, if any. Having a few million dollars with a lender gives your employer a lot more negotiating muscle than you have as
Individual borrowers may also be able to access special deals. If you haveshares in a bank or mortgage company you might be eligible for a special shareholder"s package. For example, NAB offers its shareholders a range of benefits, including waived and reduced mortgage and transaction fees, and discounted interest on some loan products.
When looking at special deals, keep in mind that a simple interest rate discount may not necessarily lead to a cheaper home loan overall. You may find that higher fees accompany the lower interest rate or that the loan conditions do not suit your needs.
2. Entry and exit costs
Entry fees are a common point of negotiation when it comes to a home loan. Some institutions have certain times during the year when they promote 'no establishment fees" in a bid to win new business or launch a new product. If a lender has reduced or removed establishment fees previously or with other loan products, it may be able to do the same for you with your loan.
Exit fees, on the other hand, are a little bit trickier to negotiate. These
are the fees paid to discharge a mortgage early, often when you want to change lenders. These fees, which are typically higher in the first few years of the loan, are designed to lock in borrowers and make changing lenders an expensive exercise.
Exit fees are rarely negotiable, but you may be able to have them reduced or waived if you are selling one property then buying another through the same financial institution. (See also the article on exit fees on p36 of this issue.)
Exploit your loyalty
Though it may not seem obvious, most financial institutions take customer loyalty very seriously. It can cost a lender as much as $1,500 to sign up a new customer once all the advertising and marketing has been taken into account. You can use this to your advantage when shopping for a home loan.
If you"ve been with one particular institution for a long time you may be in a better position to bargain.
Some lenders will even offer discounts on their interest rates to customers
who have been with them for a number of years.
And even if you don"t qualify, some lenders might be prepared to bend a little just to win your business.
The more bank accounts, insurance and investment products you have with a financial institution or company, the
better placed you are to negotiate.
If you"re in the position to close multiple accounts, switch to a different stockbroker company and change insurer, you"re likely to get your lender"s attention
very quickly.Again, keep in mind our motto: it can"t hurt to ask.
3. Professional fees There are some inescapable costs associated with buying a home, but sometimes you can make savings. In general, your lender will appoint or hire a solicitor to take care of the legal
arrangements of your mortgage and a valuer to provide a valuation of the property you want to buy.
While your lender will generally arrange the services of various professionals and pass the costs to you,some lenders have the flexibility to allow borrowers to use their own professionals provided they are properly qualified.
This situation, of course, has the advantage that you can negotiate the fees you have to pay.
4. Mortgage insurance Unfortunately, you can"t negotiate mortgage insurance. However, as mortgage insurance is often misunderstood it needs clarificationhere before we go on.
In nearly all cases, if you borrow more than 80% of what the lender considers to be the value of the property (known as the loan to value ratio or LVR) the lender will ask you to pay mortgage insurance on their behalf.
Lenders mortgage insurance (LMI) protects the lender, not the borrower, in the event that you default on your loan and the outstanding value of your loan is greater than what the lender would receive from selling your property.
Lenders mortgage insurance is usually charged as a one-off premium. It is not a set amount; instead, it is calculated on a sliding scale. That isthe percentage of the property value you borrow and the more money you borrow, the higher the premium payable on the mortgage insurance.
Although LMI can"t be negotiated, it can easily be avoided by borrowing less than 80% of the value of the property.
Even though this may mean waiting longer until you can afford to purchase your home, a saving of between $2,000 and $4,000 by not paying LMI (depending on the loan amount and LVR) may be enough to make a difference for you later on.
5. Professional package (pro pack)
Professional packages or pro packs arenot a type of loan but an overarching mortgage product that offers a range of discounts and services to reward highquality, high-profit borrowers. These products and services are bundled up as a special package. Although they are known as professional packages, they are now widely available for anyone who wants one and appears able to service a large debt.
The availability of a package can depend on your income, the size of your loan and the number of accounts you hold with an institution.Pro pack criteria vary from lender to lender and we advise you check with individual institutions before taking out your loan.
What are these packages worth? Well, the typical discount on interest rates is usually 0.50% with an annual fee of around $300.
How much will this save you? Taking the average Australian home loan of
approximately $150,000 and a variable rate of 6.5%, a 0.5% reduction could save you over $500 a year.
That may not sound like a lot of money, but as the loan value increases so do the savings. A $300,000 mortgage
produces a saving of around $1,000 per year, or more than $21,000 over the life of the loan.
This turns out to be a very handy saving, especially considering youo nly have to outlay $300 per year!
Guide to savings:
On a $750,000 loan, an interest rate discount of just 0.20% pa will reduce your annual interest expenses by approximately by $1,152, not including any additional savings
made through reduced fees. Over the term of a loan, this will save you approximately $34,560. For example:
$750,000 over 30 years at 6.04% Monthly repayments: $4,516 per month
Total interest cost: $875,736
Discount of 0.20% pa
$750,000 over 30 years at 5.84%
Monthly repayments: $4,419 per month
Monthly saving: $96
Total interest cost: $841,177
Total interest saved: $34,619
Making repayments at the full interest rate level can result in further savings $750,000 over 30 years at 6.04%,Monthly repayments: $4,516.
Total interest cost: $821,546
Total interest saved: $54,190
Total time saved: 1 year and 7 months