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6 ways to secure your lowest home loan interest rate

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Having a lower home loan rate can make a huge difference to the amount of interest you pay over the term of your loan, potentially saving you thousands later down the track. So, it’s a good idea to make sure you’ve secured the lowest home loan rate you can.

Before jumping into applications and negotiations, you need to understand the many types of rates and home loans available and the different terms that may appear. Having a thorough understanding of these things will ultimately affect how much you pay over the term of your loan.

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1. Shop around with different lenders regularly

The first and most important step is to do your research. To find the right loan and interest rate for you, it’s imperative to be aware of all your options. The easiest way to follow this step is to use an online home loan platform, that can help you compare home loans from the major banks as well as smaller lenders, all in one place.

When looking at different rates from lenders, make sure you are taking comparison rates into account. While low interest rates are good, comparison rates are inclusive of any other fees you may be charged e.g. home loan fees. This gives you a more accurate picture of what the overall charge of your loan will be or the true cost of the loan. Read more about comparison rates in our home loan interest rates guide.

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2. Negotiate with your lenders

Advertised rates are often not the lowest available, so remember to always negotiate with your lender for a better rate. In fact, according to Lendi research, Australian households with an average home loan size of $371,00 households could save up to $162,458 over a 30-year loan by negotiating or switching lenders for a more competitve rate.

It’s important to know where your home loan rate sits compared to the market average. This will give you some bargaining power when you do start negotiating. If you are trying to negotiate a lower rate on your existing loan, find out what rate new borrowers are getting and if it is lower than yours. Don’t be afraid to ask for the same rate.

It’s also wise to ensure you have a good track record of making repayments to prove to lenders that offering you a better rate is not risky. In the case that your lender is unwilling to offer you the rate you believe you deserve, you may want to consider switching lenders and refinancing. Our Home Loan Specialists can also help by negotiating a better deal for you. Book an appointment and chat to an expert today.

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3. Ask for the same rate new customers get

Banks and lenders are always undercutting each other's lowest rate in a bid to secure more customers. Lenders periodically offer lower interest rates to new customers whilst increasing the variable interest rates of their existing loyal customers.

If your home loan lender is offering a lower interest rate to new customers call them up and ask for that same rate. And, if another bank is offering a lower rate, mention that you are considering switching lenders for a better rate. You may be surprised at how quickly your bank acts.

Don't forget that your negotiating power will be strengthened by a steady repayment history, employment record and an excellent credit history.

4. Make sure your credit file is in order

If there’s one thing that can stop you getting a lower interest rate, it’s a bad credit history. Lenders who view you as a low-risk borrower (with good credit) are much more likely to feel secure enough to offer you a discounted interest rate. In order to make sure your credit file is in order:

  • Order a free copy of your credit report and check that there are no errors. You are able to access your credit report once a year for free.
  • Track any changes on your credit report.
  • Take care of any large debts. Even though you may have settled previous debts, your credit history will still show any resolved debts.
  • Pay your bills on time, and to the full amount.
  • Avoid making too many credit enquiries in a short period of time. Making frequent credit enquiries can have a negative impact on your credit score.

Whilst many focus on not accruing any bad history, some forget to develop any type of credit history at all. If you have always used a prepaid phone, or bought your car with your savings, you may never have needed to apply for credit. Whilst many may pat you on the back for your financial savviness, the bank may not view you in the same light.

Just as with a bad credit rating, having no credit history makes you a liability to lenders. This is because you cannot prove that you are capable of making on-time, correct payments, you may pose as a risk to your lender. By obtaining a credit card or moving to a monthly phone plan, you will be able to demonstrate your trustworthiness in making repayments.

Be aware that any defaults on your credit report will remain visible to lenders for 5 years.

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5. Drive down your LVR

If you’re looking to take out a new home loan, ensuring your LVR (loan to value ratio) is the lowest it can be is pivotal for securing a low interest rate. LVR is the proportion of the property price which you are borrowing.

By making the biggest deposit you can, you can lower your LVR. This signals to lenders you are a low-risk borrower and you can subsequently avoid paying Lenders Mortgage Insurance. LMI is typically charged to borrowers with less than a 20% deposit. Read our guide to LVR to find out more about how you can reduce this.

If you’re looking to refinance to get a lower rate on your existing home loan, it’s important to be making as many extra repayments as you can. Any extra money you receive - whether it’s from bonuses, lump sum payments or tax backs - can be put towards making more repayments on your home loan. This will effectively decrease the amount of principal you owe and increase your chances of getting a lower interest rate when you do refinance.

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6. Keep steady employment

Getting a low home loan rate is all about the level of risk you pose as a borrower. There are a number of ways to reduce your riskiness and a key one is maintaining steady employment. Steady employment means a steady income. Banks will ask you to provide proof of your income through documents such as payslips, group certificates and bank statements.

To assess the level of risk your income and employment pose, some lenders (usually banks) will assess your home loan application with a credit score calculated based on the following factors:

  • Employment status e.g. casual, part-time, full-time, contract.
  • Regularity of income and degree of reliance on unstable sources of income.
  • Length of time in current job. To maximise your chances of obtaining a lower interest rate, it is advised that borrowers remain in their job within the same industry for at least two years. If you have recently changed companies, this can be overlooked if the new job is in relation to your previous one. Job security is highly regarded, therefore jumping between jobs can be risky business. Lenders advise that you have no more than three employers within the last two years.
  • Low-risk professions. Some occupations are deemed ‘high’ or ‘low risk’. You may be eligible for a discounted rate if you have a ‘low risk’ profession, such as a doctor, nurse, employed by the government, a teacher, or part of the Australian Defence Force, to name a few.
  • High or low income. If you are of a high-income occupation, you may be eligible for specific loans designed for those who have a higher borrowing amount. These are often called ‘Packaged’ or ‘Pro’ loans, that offer perks that many other loans don’t. These could include, the removal of certain fees or a lower interest rate.

Home loan basics: The essentials

Principal and interest loans:

Principle and Interest (P&I) loans are when you pay a portion of the principal, the total amount of money you borrowed from your lender, and the interest charged by your lender, with each monthly repayment. This means that with each repayment, you are paying off the borrowed amount as well as the interest it has accrued.

Interest-only loans:

Interest-only (IO) loans are often set for five years, depending on the lender, and during this time only the interest on your home loan is repaid. This means that you are not paying off your principal amount. The benefit of this is the lower monthly repayments during this period, which may be helpful if funds are tight after making your home deposit and paying stamp duty.

The downside, is that your principal amount sits and accrues interest, meaning you end up paying more over the term of your loan. It is important to be ready for the increase in your monthly repayments when your loan switches from IO to P&I.

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Offset accounts and redraw facilities:

Other ways to reduce the interest you pay over the term of your home loan is through offset and redraw accounts.

Offset accounts work as an everyday transaction account. The difference is that the balance within this account offsets the amount owing on your home loan. Therefore, interest is being charged on a lower amount, meaning you make lower interest repayments.

For example, if you have $100,000 owing on your home loan, and an offset account with a $20,000 balance, this amount will be offset against your home loan. This means, your interest will be calculated on a balance of $80,000 instead of being charged $100,000, ultimately saving you interest.

Use Lendi’s Home Loan Offset Calculator to see how much you could save.

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Redraw facilities work similarly to offset accounts in the way that the balance in your redraw facility is comprised of extra repayments towards your home loan. This means if the monthly repayment determined by your lender is $1,000, and you pay $1,200, $200 is deposited into your redraw facility each month. These extra repayments are used to offset your home loan balance helping reduce your interest. Plus, you can access the funds in your redraw facility if you need them.

The main difference between the two, is the accessibility to the account. Because offset accounts work as everyday transaction accounts, a swipe of your debit card gives you access to your funds.

However, further measures are required to access the funds available in your redraw facility. You may be required to visit a branch or telephone your lender to access your account. Depending on your situation, both options have their advantages and drawbacks, whilst both providing savings on your interest repayments.

Fixed, variable or split loan

When choosing your home loan, you will have the option of choosing a fixed interest rate, a variable interest rate, or splitting your home loan between the two.

Fixed rate home loans

If you prefer constancy and enjoy the comfortability of the expected, then a fixed rate loan is for you. Fixed rate loans are loans set at a constant interest rate for a fixed number of years. This interest rate is often slightly higher than the current rate to account for any interest rate rises during your fixed rate term.

Advantages:

  • Consistent monthly repayments. This allows for more accurate budgeting.
  • If interest rates rise, you continue paying your fixed rate.

Disadvantages:

  • Limited features with your home loan (ie. offset accounts and redraw facilities are often unavailable).
  • If interest rates fall, you continue paying a higher rate.
  • If you wish to refinance or switch to a variable rate home loan, lenders often charge a break fee.
  • You cannot make extra repayments on your home loan.

Variable rate home loans

If you’re of a competitive mindset, and want the lowest rate possible at all times, then a variable interest rate may be for you. Variable rates are based on the Reserve Bank of Australia, and are determined by your lender. If interest rates plummet, you will reap the rewards of a low interest rate. Conversely, if they rise, you may find yourself paying more than you anticipated.

Advantages:

  • You benefit when interest rates fall.
  • You are able to make extra repayments on your home loan. Not only does this mean you will pay off your loan faster, but reduce the total amount of interest accrued.
  • Variable rate loans have the benefit of offering offset and redraw facilities. These aid in reducing the amount of interest paid over the term of your loan.
  • No exit or break fees if you wish to refinance or switch lenders.

Disadvantages:

  • If interest rates rise, so does your home loan interest rate.
  • Unable to predict monthly repayment amounts, making budgeting difficult.
  • You need to ensure you can afford any interest rises when applying for your loan amount.

Spit-rate home loans

Split rate loans can give you the best of both worlds. You can fix a portion of you home loan, and keep the other portion at a variable rate. This can be divided upon your discretion, many choose to split 50:50, but you do have the freedom to split 80:20, for example.

So what next?

By understanding the different types of interest rates and home loans available to you, you are able to make an informed decision. Having this knowledge allows you to minimise the amount of interest you pay over the term of your loan.

By being aware of offset accounts and redraw facilities, the drawbacks of an IO home loan, and following the above 6 steps, you can not only secure a lower home loan rate, but minimise the amount of interest repaid over the term of your loan (because the former doesn’t always equal the latter). If you have any further questions, speak to one of Home Loan Specialists today.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: standard variable rate, low interest, fixed rate home loans, standard variable loan, split loan, new purchase, refinance, first home buyer

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Important legal stuff

Lendi is the trading name of Lendi Pty Ltd (ACN 611 161 856, Credit Representative 518849), a related body corporate of Auscred Services Pty Ltd (ACN 164 638 171, Australian Credit Licence 442372). We will never sell your email address to any third party or send you nasty spam, promise.
# Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
Lendi is a privately owned and operated Aussie business. Our mission is to provide Aussies with the right experience when choosing a home loan from our panel of lenders including ClickLoans, a related body corporate of Auscred Services. Although Lendi compares over 1600 products from over 35 lenders, we don't cover the whole market or compare all features and there may be other features or options available to you. While Lendi is 40% owned by founders and employees, we have also been supported by some great minority shareholders including Bailador, Macquarie Bank Ltd and a number of Australian sophisticated investors. We have an independent and founder led board.
WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. The comparison rates are based on a loan amount of $150,000 over a loan term of 25 years. Fees and charges apply. All applications are subject to assessment and lender approval. Quoted rate applies only to PAYG loans with LVR of 80% or less with security in non-remote areas. All applications are subject to assessment and lender approval.
EXAMPLE: This example is current as at 20th October 2016. A Click Loans Online Principal and Interest Loan of $150,000 over 25 years has monthly repayments of $767. This is calculated based on the interest rate of 3.69%, comparison rate of 3.69%, upfront fees of $0 and annual fees of $0.
IMPORTANT INFORMATION: Loan terms of between 1 Year and 40 Years are available subject to lender and credit criteria. Maximum comparison rate will not exceed 14.99% (see comparison rate warning above). Any calculations or estimated savings do not constitute an offer of credit or a credit quote and are only an estimate of what you may be able to achieve based on the accuracy of the information provided. It doesn't take into account any product features or any applicable fees. Our lending criteria and the basis upon which we assess what you can afford may change at any time without notice. Savings shown are based on user inputted data and a loan term of 30 years. All applications for credit are subject to lender credit approval criteria.
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