With interest rates climbing, many first time homeowners and refinancers are considering how they can get the best interest rate on their home loans. If this is you, you may have come across the term ‘discounted mortgage rate’ in your research and wondered what it meant precisely. And could it be applicable to you?
In this post, we’re delving into what’s known as a ‘discounted mortgage rate’ – what is it, why you need to know about it and how can it impact your search for the ‘perfect’ mortgage for you.
What are discounted mortgage rates?
Most lenders will have a standard interest rate that they set for their loans. Known as the standard variable rate (SVR), this is the default interest rate that will apply to variable rate loans. They are typically higher than interest rates on fixed-rate mortgages or discounted deals.
However, lending institutions (both banks and non-banks) also have the discretion to discount their SVR. These are known as ‘discounted mortgage rates’. Often borrowers are offered or can negotiate a discounted mortgage rate relative to the SVR and get a better deal. This means that those borrowers would pay a lower interest rate that is the standard offer by that lender.
For the major Australian banks, most discounts are between 50 and 150 basis points.
Why do lenders discount mortgage rates?
There are many reasons that a lender might discount mortgage rates.
Control risk
Discounting is a tool that allows lenders to control the risk of different types of loans and borrowers. In other words, they can bring in less risky borrowers by offering them a ‘better deal’ via a discounted mortgage rate.
Control their mortgage books
Discounting also allows lenders to control the composition of their mortgage books in terms of what kinds of loans they hold, the spread of lenders and even the growth and return on their ‘investment’.
Increase their competitiveness
By offering discounted mortgage rates, lenders can compete with other lenders for more customers. Their lower interest rate could be a drawcard to bring in new customers, or keep current customers loyal.
How to compare discounted mortgage rates
The RBA has said that comprehensive data on interest rates actually paid by mortgage holders is difficult to obtain. This is because lending institutions have the discretion to apply discounts that are advertised and unadvertised.
This lack of comprehensive data effectively means there is a lack of transparency around discounted mortgage rates. It also means that it can be difficult for you, as a borrower, to accurately compare mortgage products of different lenders.
This is where a lending expert, like our Lending Loop team, can help. We can access a huge range of home loan interest rates and advise you on the best deal for your situation.
Negotiating a discounted mortgage rate
Negotiating a discounted mortgage rate is not as hard as it sounds. You have every right to call your current lender (or a new lender) and ask them for a better deal. Each lender has their own criteria for exercising their discretion to offer a discounted mortgage rate, but there are some overarching benchmarks that they’ll be considering.
New customers
Lenders are more likely to negotiate a lower interest rate when they are actively looking for new customers. Check out your current lender’s advertised interest rate for new borrowers. It could well be lower than the rate you are paying (which means it’s a great time for refinancing).
Assessment of risk
Lenders will assess the risk associated with different types of loans and borrowers. Borrowers it deems less risky will likely be offered a larger mortgage discount than those that are considered a higher risk.
‘Less risky’ can include several factors, such as:
The borrower’s occupation or profession. Higher income borrowers are more likely to have more in savings and to apply for larger mortgages, which will have more interest paid over the life of the loan. The bank looks at the savings and the size of the mortgage rather than the actual occupation or profession that is relevant. Industries such as medicine, law, advertising, IT, mining and financial services could be considered ‘high income’. Specific roles such as CEO, director, executive or manager may as well.
Borrowing less than 80% of the value of the property.
Having a good credit score. This combined with the proven ability to earn a steady income and meet your financial commitments can make you a less risky borrower.
Your loan repayment record on your existing mortgage. If you've made all your loan repayments on time, you may have a higher negotiating capacity for a discounted mortgage rate.
If you’d like to negotiate a discounted mortgage rate with your lender – or with a new lender – we’d love to help. We can cut through the confusion when comparing interest rates and home loan offers. And we can help you negotiate a discounted rate with your preferred lender.
We're here to help
We know how confusing (and exhausting!) it is, comparing mortgages and interest rates. Our team has the experience, expertise, and connections to cut through the confusion and find the most competitive mortgage rates. We’re here to help you through the process, right through to the end of your loan repayments – and we’re free! Get in touch with Lending Loop today.
