Seven ways to tackle home loan hikes

21:42, May 20 2014
dollar coin
CONSUMER POWER: Fight back. Call your bank manager. Kick up a stink. There are thousands of dollars at stake if you do.

Those who don't live under rocks will be all too aware that higher home loan interest rates are here.

We have tearfully kissed goodbye to the lowest offers in 50 years, and resigned ourselves to a steady climb in interest payments.

The Reserve Bank has already hiked official rates twice, by half a percentage point in total.

Economists expect two more this year, then another four next year. It would be naive to think the big banks won't be quick to pass those on to customers.

By the end of next year, we could easily be looking at floating interest rates of 7.5 to 8 per cent.

But there is no point shrugging your shoulders or crying about it. Here are seven strategies for taking control of your home loan costs. 

1. Play hardball

Back in the glory days of mid-2013, juicy discounts of half a percentage point were quietly handed out to customers bolshie enough to ask for them.

Nowadays the banks have got much smaller profit margins to play with. Squirrel mortgage broker John Bolton reckons they are down by as much as 30 per cent on some loans.

That means there is less fat for them to carve off, but it does not mean you can't wrangle a decent deal.

The current scene is dominated by market-leading "hero" rates, like ANZ's two-year special of 5.95 per cent.

The good news is that even if you are not with ANZ, you should be able to score the same rate:

"If your bank's advertised rate is higher than another bank's advertised rate for the same term, you should reasonably expect your bank to match it," says Bolton.

2. Shop around

If your bank won't play ball, threaten to leave them for a more generous partner.

Any guilty pangs arising at this point should be quashed, immediately. You don't owe your bank anything (except, in literal terms, a stupendous sum of money).

There is usually at least a percentage point's difference between the cheapest and most expensive mortgages advertised.

On a standard $400,000 loan, that translates to $4000 a year in extra interest.

The danger of a misplaced sense of loyalty is that it could stop you from playing the field. Take some inspiration from the cougars stalking the Viaduct on a Saturday night, and get amongst it.

3. Build some equity

Until recently, some people were buying million-dollar houses with a deposit consisting of a handful of loose change and pocket lint emptied onto the bank counter.

The Reserve Bank's loan-to-value ratio (LVR) rules have made it tougher, but desperate home-hunters are still champing at the bit to mire themselves in debt.

What they may not realise is that with a deposit of less than 20 per cent, they are signing up to be second-class citizens.

Most banks have abandoned the blatant split-pricing discrimination between the equity rich and the equity poor, but it is still there in other guises.

Customers at ANZ with less than 10 per cent equity will pay an extra half a per cent, for example.

At other banks, the usual low equity margins and fees, which were lurking in the fine print long before the LVR rules came along, still apply.

"So it's still expensive, but it's not as crazy expensive as it was," Bolton says.

The equity-poor are also almost always ineligible for all the banks' hero rates. Because the banks can afford to cherry-pick high-LVR customers, that puts them in a terrible position for bargaining.

"Anyone with less than a 20 per cent deposit needs to pick up the banks' carded [advertised] rates, no negotiation," says Bolton.

If you can make extra payments and crack the 20 per cent threshold, you will save a small fortune.

4. Look out for promos

As well as the aforementioned special rates, almost every bank offers up cash and other goodies to try and poach their rivals' customers.

Currently, ANZ is offering up to $1500, Westpac and ASB up to $2000, and BNZ up to $3000, all of which have various strings attached.

Kiwibank has a refinancing package, worth up to $2000, covering the likes of valuation and legal fees.

If you are refinancing with a new bank, bear in mind it will cost you money, and be sure to ask your new bank to meet at least some of the costs.

Don't let the allure of cold hard cash corrupt you from the most sensible choice, either. 

There is no point getting $2000 for "free", only to spend an extra $3000 on break fees or a higher interest payment. 

5. Save a buffer

If you managed to snag a rate starting with a "4" in recent months, refinancing at 6.5 per cent is going to feel like a bucket of cold water has been dumped over your head.

To avoid the shock, consider saving a little extra on the side while you are still benefiting from the bargain prices.

That will not only acclimatise you to higher rates, but actually help pay off the mortgage even faster.

6. Lock it in

The fat profit margins on floating loans mean they are actually more expensive than fixed rates up to two years.

Part of the reason banks are now losing margin is that people are flocking away from floating rates again, in a sort of seasonal migration.

"Banks hate it," says Bolton.

Whatever makes the banks grumpy is usually good news for the rest of us. 

While floating rates rise with the Reserve Bank's official cash rate, fixed rates have already priced in the expected changes.

"Fixing for two years has become an absolute no-brainer," says Bolton.

His analysis shows short-term fixed rates of a year or two usually perform better than longer-term ones.

For conservative folks who want more certainty, even four and five year rates "are starting to look like quite good value for money".

7. Hedge your bets

The other option is to hedge your bets and try to get the best of both worlds.

Bank of New Zealand chief economist Tony Alexander recommends keeping at least a portion of your loan floating, so you have the flexibility to make extra repayments.

It is entirely possible that interest rates could go higher than everyone expects, or stay lower than expected.

"To reflect that risk, you might want to have a short-term fixed rate and a longer-term fixed rate out towards three to four years," Alexander says.

For example, you might keep one third floating, fix one third at two years, and fix the last third on a four-year term.

Alexander says some people prefer a simpler set-up, and everyone will have their own preferences.

As always, there is no cookie-cutter approach, it is different strokes for different folks.

Whatever you do, don't take higher mortgage rates lying down.

When banks are minting a run of record profits, it is time to exercise the power of the consumer.

So fight back. Call your bank manager. Kick up a stink. There are thousands of dollars at stake if you do.