In times gone by, getting a home loan used to be a question of putting on the Sunday suit, going to your bank manager and asking on bended knees for a mortgage.
But times have changed. The number and variety of lenders vying for market share has never been greater. Banks, building societies, mortgage managers and insurance companies are all desperate to increase their share of the lucrative home-loan market.
As the property boom cools, this competition will only heat up. Lenders will have to work harder to win over dwindling numbers of borrowers. And 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 find yourself being able to negotiate favourably with your
- real estate agent
- property inspectors
- even some Government departments.
These opportunities won't just fall into your lap. You need to demand more. While you will frequently be turned down, a couple of minutes of social discomfort in the present are nothing compared to the financial discomfort brought on by twenty 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 five per cent home loan with no ongoing fees and charges is not going to get you anywhere. Lenders are professionals and in the game to make money. They are unlikely to 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 their competition.
The key to a good outcome lies in shifting the focus of conversation onto your own terms. Focus the negotiations 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? As usual, knowledge is power. First, you need to know your own bargaining position, its advantages and limitations. Second, 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 is essential to pause for a little introspection. You need to take a long, hard look at yourself and determine how much your business is worth in the eyes of your lender.
Therefore, you need to establish how much you can afford to borrow based on your present income and expenditure. The Income and Expenditure calculator 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 you and your spouse (if applicable), 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 and hopefully you will have a healthy, positive number that is roughly what you can afford to repay each month on a loan. Now 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 is little point in purchasing a house that you cannot 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 but remember that you are the customer that lenders are trying to attract. Clarify what they are offering.
Knowing the features being offered by other lenders will put you in a much stronger bargaining position. Ask the lender of your choice 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 them Your Mortgage Home Loans, is based in Sydney but making a big push for increased market share in Victoria. Each new Victorian customer they get will increase their profile in the new area, and is therefore worth a premium to them. 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.
At the table
You have 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 is time to step into the office and 'talk turkey'.
Before you start negotiating with your lender you should know which loan costs will be open to negotiation. Some will be, some won't ever be.
Lowering Interest rates
Let's not beat around the bush. 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 a few little tricks.
With over 3,000 lending products on the market, it is 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.
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 have accepted these discounts, or bothered to inform 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 an individual.
Individual borrowers may also be able to access special deals. If you have shares in a bank or mortgage company you might be eligible for a special shareholder's package. For example, the National Australia Bank 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.
Coming and Going
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, they may be able to do the same for you and 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. Rarely negotiable, you may be able to have exit fees reduced or waived if you are selling one property and buying another provided that the loan remains with the original financial institution.
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 have been with one particular institution for a long period 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 can threaten to close multiple accounts, switch to a different stockbroking company and change insurer, you are likely to get your lender's attention very quickly indeed.
Again, keep in mind our motto: it can't hurt to ask.
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.
No, you can't negotiate mortgage insurance although it is a misunderstood concept and deserves some clarification.
In nearly all cases, if you borrow more than 80 per cent of what the lender considers to be the value of the property (known as the loan to valuation ratio or LVR) they will ask you to pay mortgage insurance on their behalf.
Lender's mortgage insurance 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.
Lender's mortgage insurance is usually charged as a one-off premium and is calculated on a sliding scale. That is, the greater the percentage of the property value you borrow and the more money you borrow, the higher the premium payable on the mortgage insurance.
While it can't generally be negotiated, mortgage insurance can be avoided by borrowing less than 80 per cent 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 in mortgage insurance fees (depending on the loan amount and LVR) may be enough to cool your heels.
The gasp you can hear in the background is your lender thinking, "Oh no, they aren't going to tell people about our professional packages!" Yes, we are.
If you have a high income, a large loan, multiple bank products or a particular job, you may be invited to join a secret band of borrowers who have managed to negotiate a 'professional package' with their lender. You haven't heard of professional packages? It is not surprising, as lenders do not go out of their way to advertise them. Cynically, these packages reward those who can most afford to pay a higher interest rate with a reduced interest rate and other benefits.
Now, before you run screaming to you lender in protest, take the time to understand why professional packages are offered.
Low risk, lower interest rate
There has been a lot of talk in recent months about the growth of 'non-conforming' loan products. These are loans designed for borrowers who don't fit the standard lending criteria set by mainstream lenders.
Whether it is because they are self-employed, have a poor credit history, low deposit or wish to purchase a property that mortgage insurers will not approve (e.g. inner city apartments under 50 square metres), these borrowers find it very difficult to obtain home-loan finance through conventional means. Their only alternative is a 'non-conforming lender', but the problem is they must pay their lender for the additional risk they carry through a higher interest rate.
In much the same way, if you are able to demonstrate to your lender that you are a lower risk than the average borrower, and your lender agrees with you, you may be rewarded by qualifying for a professional package discount.
What are these packages worth? Well, the typical discount on interest rates is usually half a percentage point 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 per cent, a 0.5 per cent reduction will save you over $500 a year. OK, that is not 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. Not a bad saving for an outlay of only $300 per year!
Although they are known as professional packages, the availability of a package can depend on your occupation, income, the size of your loan and the number of accounts you hold with an institution. These criteria vary from lender to lender and we advise you check with individual institutions prior to taking out your loan. The following table describes the criteria and benefits offered by the four major banks, although regional banks and non-bank lenders may also offer similar packages. All you need to do is ask.
Government helping hands
While negotiating with the government on taxes is impossible, there are ways to minimise the stamp duty that you pay. All it requires is a little inside knowledge.
Many state governments offer special deals to home buyers that meet certain criteria. For example, the NSW government exempts first-home buyers from stamp duty on purchases over $200,000 in the metropolitan area and $175,000 in non-metropolitan areas. Stamp-duty concessions are given on sliding scale for purchases between $200 000 and $300 000 in the metropolitan area and $175,000 and $250,000 in other parts of the state.
These deals do vary, and the best place to determine if one applies to you is the relevant Office of State Revenue in your state. If you have access to the internet, you can access all of these organisations' home pages from www.firsthome.gov.au.
The Federal Government's First Home Owner Grant (FHOG) scheme is certainly one of the handiest kickstarts on the road to home ownership. Though the grant amount has steadily been reduced, first-home buyers in all Australian states and territories can receive a $7,000 grant towards the purchase of their property. The grant is available only on residential properties and not those bought as an investment.
A word of warning. Don't apply for the FHOG if you are not eligible. In NSW, an estimated one in ten applications for the grant has been investigated for fraud. Applicant's tax, credit ratings and land-title records have been scanned to prove the authenticity of their claim by the Office of State Revenue and more than 4,000 individuals have had to repay the grant with interest.
Buying a property
Now that you have negotiated the best possible deal on your mortgage, it is time to look at the ins and outs of getting the best deal when buying a property.
Know your market
The most important step in negotiating the best price on your dream home is to know what the property is really worth. To do this, it is vital to have a good idea of what property prices are doing in that area. If you are lucky there will be a service in your city which will provide a full listing of property sales in a given area or postcode.
Local councils should be able to provide some sales information. Real estate agents are another great source of information, although not strictly independent.
Tools of this sort are invaluable in the bid to get your home for the best possible price. Knowing how much comparable houses have sold for recently will give you a much better idea of whether you are getting value for money on probably the most important purchase you will ever make.
This is perhaps the most delicate negotiation you will encounter in buying a home. You are trying to get the house you are interested in for the lowest possible price, but the vendor is trying to get as much as possible for it.
While it is important to be shrewd in your negotiations, remember that you want to buy this property. You might end up kicking yourself if you are too tight fisted to make a reasonable offer and someone else walks away with your dream home.
Some questions to ask when buying a property are:
- Are there any rules for making your first offer?
- How do you convince the vendor that you are serious without overplaying your hand?
- How can you tell whether real estate agents really mean it when they say sellers might accept the offer "if you come up a little more but there are several people interested"?
- How can you tell if any other buyers are interested?
Unfortunately, there are no hard and fast answers to these questions.
One of the best rules for the long and often tortuous process of buying a house by private treaty (as opposed to buying at an auction) is to start off low, but to have a spending limit.
Say to yourself, "I want this house, but only up to a certain price. After that it is overpriced and I am not interested any more". Setting this limit can avoid the problem of the final days or weeks of negotiation where offers are creeping along in increments of $500. If you get to your spending limit you can say to the agent, "that's my final offer", and mean it.
As with all negotiations, the party with the coolest head will walk away successful. If you allow yourself to become too emotionally involved in the buying process, you may later regret decisions made in haste.
There are all sorts of theories and strategies for the best way to bid at an auction.
Advice we have heard includes, "bid in big wads to show everyone that you are serious", "bid in small sums to slow the auction down", "open the bidding", "don't bid until the reserve is reached", "open with a bid close to your top figure and hope to blow all the tentative bidders out of the water".
The truth of the matter is that all of these strategies have their place in the auction room. The bidding strategy you use should depend on what the opposition is doing, the type of property, the number of serious bidders and the mood of the auction.
If the property doesn't reach its reserve it is said to be 'passed in'. At this point the highest bidder will be offered the first opportunity to negotiate with the vendor.
Even if you are not the highest bidder but are still interested in the property if it doesn't sell, you should make your interest known to the agent. Christopher Bragg, auctioneer at Blackburn & Lockwood in Victoria, believes three main strategies worth considering:
- Start strongly with good solid bids in the hope that your strength and purpose will deter other bidders
- Make your bid at the last minute and "leave the final bidder, who at the very point of the final knock is picturing him or herself in the house, deflated"
- Go all out and toss up a bid just shy of your top price and hope to scare off any competitors.
As we said above, the mood of the auction room will often suggest the best strategy.
Another vitally important aspect of bidding at auction is not to exceed your limit.
Bragg also suggests you get someone else to do your bidding so as to distance yourself from the emotional involvement of the 'must-have' syndrome.
If you do bid on your own behalf, remember your spending limit. Write it down, etch it into your mind. Do whatever it takes but DO NOT exceed it. An auction is a frantic negotiation - keep your wits about you. Remember also that in some states there is no 'cooling off' period. You can't say after an auction, "I've changed my mind."
Before the auction
One strategy employed by some prospective buyers is to walk up to the vendor before the auction begins and make a firm offer. Opinion is divided as to whether this is a good idea.
Some say that this offers buyers the chance to pick up a bargain from a nervous seller. Others believe that a pre-auction offer will force the price up or set a bottom figure.
An awareness of the current state of the property market should guide this decision. If the market is booming, a pre-sale offer will probably convince the owner to proceed with the auction in the hope of beating it. If the market is depressed, your offer might well be accepted gratefully. But you risk missing out on a bargain that you might have picked up at auction.
Auctioneers and real estate agents tend not to think too highly of pre-auction offers. They would rather put all the interested parties together and let the law of the jungle sort out the price.
While a pre-auction offer is unlikely to score you a bargain in a buoyant market, it is very important that the auctioneer or agent knows of your interest before the auction, just in case another prospective buyer decides to throw in an early offer.
There is a range of different tactics you can use to try and turn an auction in your favour and in the end different strategies will work better for different people. It all depends on if you have the courage to carry them out!
Low starting bid - when an auctioneer wants bidding to begin at a particular level, jump in and offer a much lower bid. When the auctioneer protests, dare other bidders to make a higher opening bid. Few ever do.
Slow down the bidding - when bids are rising by $10,000 a round, pop-in with a $1,000 increase. Again, the auctioneer protests and you ask the other bidders if they are prepared to pay an extra $10,000 to beat your $1,000. Bidding generally slows downs to $1,000 a round.
Find the dummy bidder - depending on which state you are in, the vendor is allowed to make one or more 'dummy bids'. However, you can ask the auctioneer if the bid is real which embarrasses the auctioneer and puts doubt in the mind of other bidders as to the real level of interest in the property.
Place the property on the market - once a property has reached the reserve amount agreed to by the vendor it is 'on the market' and will be sold to the highest bidder. Before this level is reached, the property is 'passed in' and may or may not sell to the highest bidder. Repeatedly ask whether the property has been placed 'on the market', informing bidders at this point that their next bid may lead to purchasing the property, possibly scaring them from making further bids.
Master of ceremonies - instead of standing reverently in front of the auctioneer, walk to the front of proceedings and make your bids staring into the face of opposing bidders. Joke with the crowd, make faces and generally undermine the authority of the auctioneer.
Make a knock-out bid - make a calculated and confident bid well above that made by competing bidders. The other bidders rationalise that you mean business and aren't prepared to enter a bidding war for the property.
Auctions can be a frantic event, so it is important to keep your wits about you. Most Australian states don't offer a cooling off period after auctions so the bids you make all have the power to make you a home owner. Remember what your maximum bid is and ensure that you don't exceed it.
The bottom line
The primary consideration when choosing a mortgage or buying or selling a house is to get yourself into the best possible financial position and arm yourself with knowledge. There is a certain satisfaction in knowing not only that you got a good deal, but it was a deal you struck yourself.
A successful negotiation is one in which everyone walks out satisfied.
Don't be afraid to ask for something simply because you think you might not get it. Remember, if you don't ask, you don't get.
If you walk into a negotiation room confident and well informed, you may well walk out financially better off.