Why the time is ripe to ask for a discount on your mortgage

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Existing borrowers are currently in pole position to negotiate discounts on their mortgages, with lenders fighting to keep customers as new borrower numbers fall and refinancing activity surges.

Figures from PEXA, a platform for digital property settlement, show the number of new mortgages fell in the year to June 30, with new loan activity returning to pre-pandemic levels.

Existing borrowers are currently in pole position to negotiate discounts on their mortgages as lenders fight to keep customers.Credit: Brook Mitchell

By contrast, refinancing activity continued to surge during the financial year in response to rising interest rates and attractive incentives offered by major banks enticing borrowers to switch lenders.

“The rise in refinancing activity in [the financial year] has also been boosted by the high proportion of recent borrowers who had taken out fixed-term loans over the preceding few years,” says Mike Gill, the head of research at PEXA.

“These borrowers are now rolling off their low-interest, fixed-term loans, leaving them open to a better deal,” Gill says.

Lenders are turning their attention to existing customers with Reserve Bank of Australia (RBA) lending data showing the gap between the interest rates paid by existing customers and those offered to new customers is narrowing.

Lenders usually offer new customers a more competitive deal than their existing customers; meaning that those who remain with their lender and do not periodically ask for a discount on their interest rate can pay a “loyalty tax”.

Analysis of the RBA figures by Canstar shows that in December 2022 existing borrowers paid 0.51 percentage points more in interest than new borrowers.

The RBA figures, for May, the latest available, show the gap has narrowed to 0.37 percentage points, with existing borrowers paying an average variable rate of 6.03 per cent, while new customers were offered interest rates of 5.66 per cent, on average.

The cash rate was increased by 0.25 percentage points in June, though it remained unchanged in July and August.

Canstar’s Effie Zahos says lenders appear to be putting in more effort to retain their existing home loan customers.

Effie Zahos, Canstar’s editor-at-large, says with fewer new borrowers in the market for home loans and the remarkable volume of loans being refinanced, lenders are forced to put more effort into retaining their existing customers.

“The good news is existing customers may be able to negotiate discounted rates to rival some of the deals offered to new customers,” Zahos says. “Finally, it looks as though the higher price borrowers pay for being loyal to their lender is narrowing.”

Canstar’s research shows even a rate discount of 0.25 percentage points on a $500,000 loan over 30 years could lower repayments from $3,320 a month to $3,236 – a saving of $84 per month, or $1,008 in the first year.

Ray Hair, the managing director of Connect2Broker, a broker referral service that works with Canstar, says its network of brokers is reporting borrowers with solid equity in their properties are securing rate discounts from their lenders.

“The appetite to retain good customers is the driving force for lenders, but they are being selective about the customers they want to keep,” he says.

Borrowers in the best position to wrangle a discount are those who have equity in their properties of at least 20 per cent, whose mortgages are worth $500,000 or more, and who have made their repayments on time.

“Those who have at least 40 per cent equity are in an even stronger position to negotiate a better interest rate,” he says.

Mortgage brokers are obliged to act in the best interests of borrowers and to find the best deal that suits their needs and objectives, Hair says.

Hair says an advantage of using a broker is that the borrower’s current lender knows the broker will be looking to get the best available deals, putting pressure on the current lender to offer a rate discount.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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