ANALYSIS: You’d be hard pressed to find a Kiwi mortgage-holder right now who doesn’t want interest rates to come down.
In the last two years the average one-year rate has gone from 3.7% to 7.3%, which on a home loan of $500,000, equates to an extra $370 a week.
Recent noises around the future of interest rates suggest homeowners can expect either interest rate relief in the second half of this year or another rate hike.
Putting the volatility of the market expectations aside, many borrowers don’t realise they can, in many cases, negotiate a lower interest rate than the ones advertised.
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This opportunity comes up at two points: when you take out a mortgage and when your fixed rate comes up for renewal.
That’s why you’ll find the first question investors ask their bank is: “How much can I negotiate off my interest rate?”
I surveyed brokers at Opes Mortgages to see what interest rates they negotiated last week. The results were surprising. One broker told me a bank had been willing to lower its advertised five-year rate by 0.75 percentage points for his client.
The survey results suggest the biggest discounts could be found on one-year rates, followed by savings on the 18-month and four-year rates. The smallest discounts were on the two- and three-year rates.
The average one-year rate advertised by the big banks was 7.37%, but after negotiations they were willing to offer 6.94% (on average). That 0.43 percentage discount equates to a saving of $41 a week ($2150 a year) on a $500,000 mortgage.
However, the average discount on two-year rate was just 0.06% – a saving of just $6 a week on a similar-sized mortgage.
But why are banks willing to negotiate aggressively on some interest rates and not on others?
Most banks have cut their two and three-year rates since the start of this year, while they haven’t changed their one-year rates in 80 days.
That suggests the longer advertised rates stay the same, the more room there is for negotiation.
Because the two and three-year rates have recently been updated, banks are less willing to give a discount – they have already adapted to market conditions.
But right now, there is a lot of uncertainty when it comes to the shorter six-month and one-year rates. Some banks think the OCR will go up. Some think it will stay the same. So, instead of decreasing their rates publicly, the banks are discounting in private, holding off decreasing their interest rates until the picture becomes clearer.
But before mortgage-holders march into their bank demanding a 0.43 percentage point discount on the one-year rate, heed these words of caution: Some banks will offer bigger discounts than others. If one bank advertises a higher rate than its competitors, it may have more room for a discount. But the opposite is also true. If a bank already offers a sharp rate, don’t expect a large discount.
Similarly, interest rates change all the time. These are the discounts mortgage brokers negotiated last week. But the interest rate market changes daily. These same discounts may not be achievable next week.
Lastly, not all borrowers are in a position to negotiate a discount. If you are a first-home buyer with a 10% deposit, you’ll pay a higher interest rate than what you see advertised online.
So don’t walk into the bank and say, “I read on OneRoof that I can get 0.43% off the advertised one-year rate … where’s my discount?” ... It doesn’t work that way. Instead, use this to get a general idea about what discounts are happening and why.
- Ed McKnight is the resident economist at property investment company Opes Partners
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