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Homeowners aren't effective negotiators with their banks. A review of the official data on how much borrowers are paying reveals the extent of the problem
It is a widely held assumption that you can win a discount on your mortgage interest rate if you negotiate with your bank.
No doubt many do, and gain the advantage of the savings.
But the evidence is not so flattering to most borrowers.
It seems that banks are far better at negotiating with their customers - in fact, the evidence shows that they are consistently winning higher rates off them.
Banks publish their rate offers in their "Rate Card". interest.co.nz sets out these offers on our mortgage page in a comprehensive listing.
You would think that this would set the upper limit of what you would pay - these are the rates from which you should be able to negotiate a discount.
But in actual fact, banks are successfully negotiating with many customers for them to pay more than the rate card.
At first sight, this may seem an odd outcome. But there may be many reasons why a bank will charge you more than their carded offer.
What is surprising is that these situations clearly outnumber the people who do win a discount through negotiation.
The Reserve Bank publishes data monthly of the "new customer average rate %" for the whole bank industry mortgage book.
Comparing that rate with the banks' own rate cards reveals the extent of banking wins through negotiation.
This table summarises the situation using the latest RBNZ data available:
|as at November 2012||Average bank||RBNZ data||Actual %||Actual $|
|ratecard %||%||premium||cost NZ$mln|
|6 month rate||5.154||5.29||0.136||51.532|
|1 year rate||5.203||5.29||0.087||27.919|
|2 year rate||5.373||5.42||0.047||3.638|
|3 year rate||5.785||5.81||0.025||0.368|
|4 year rate||6.085||6.16||0.075||0.786|
|5 year rate||6.342||6.46||0.118||0.037|
This is a surprising result.
What it is suggesting is that banks can effectively up-sell you when they get to the end of the negotiation process.
It may also be as a consequence of New Zealand's 'small business' environment. Most small businesses fund their working capital needs with a loan secured over personal real estate. Most of these loans will be recorded as a residential mortgage. And because the bank will know that these are essentially 'business loans', they will risk-price them. It is harder for a sole trader or a small business person to negotiate a better rate if their financial situation is not that flash.
Another reason may well be that New Zealanders are hopeless negotiators. No doubt the value that mortgage brokers bring to their clients is the skill of effective negotiation. But most Kiwis don't use mortgage brokers.
There is huge potential for borrowers here.
There are 1.4 million mortgages in New Zealand, and these are probably on about 1 million properties.
Every 0.1% improvement results in NZ$180 million in borrowers pockets per year. And because this type of negotiation is a zero-sum transaction, bank income will fall by the same amount.
A comprehensive listing of all current mortgage rates are here »
Work out how much you would save using our handy full-feature calculator, here »
Mortgage choices involve making a significant financial decision so it often pays to get professional advice. A Roost mortgage broker can be contacted by following this link »