At least $1 billion in 'excess' interest cost is being left on the table by home owners who don't negotiate hard enough for the best mortgage rate available, sure to rise as policy makers create the conditions for higher rates

interest.co.nz estimates that homeowners could be leaving as much as $1 bln per year on the table because of the 'loyalty' they grant the major banks.

Interest rates are rising and it is expected that mortgage interest rates will rise as much as +2% more before this 'normalisation' cycle is over.

Home loan borrowers have been the main beneficiaries of the low interest rate policies that have swept the world in the past ten+ years, since the GFC. But they could be the main sufferers as central banks try and return to policies that do not require such low rates or such huge money printing (QE). Part of their motivation is to recharge their policy resources for the next (inevitable) financial crisis (whether it be financial or pandemic-induced).

However, that involves benchmark rates rising, and the direct flow-through to real home loan rates.

As at the end of July there was $316 bln owed to banks for home loans. The August level will be revealed later this week at will almost certainly rise to close to $320 bln. More than 95% of that is owed to just the five largest banks - $300 bln plus.

In the past year, borrowers paid almost $10 bln in interest on these loans. That is about to rise sharply. (And recall it was just under $12 bln in 2018, +17% higher.)

In a rising rate market what can borrowers do to protect themselves?

First you can "go long", locking in lower rates for longer periods. But you may need a professional to advise whether this is the right strategy for you. In many cases it may not be. The math is important, and it will depend in part by what the difference is between the terms you want to choose from.

Second, you can switch your repayment style to focus on paying down the amount you owe, rather than worrying about the interest rate. This however is only a strategy for those who can muster the long term discipline required to make revolving credit arrangements pay off. This is certainly not a strategy for those who use their house as an ATM to support impulse spending.

Thirdly, you can choose the lower interest cost option. Most borrowers aren't.

As you can see from the rate spread tables below, at least 50 bps in being conceded to the largest banks at present. (The red markers are the main banks, the blue markers are the challenger banks.)

The math is straightforward. If $300 bln is at a cost of +50 bps higher than the lowest cost option, then that means $1.5 bln could theoretically be saved just by shifting to the cheapest cost option.

However, there will be practical limits to achieving these savings. The smaller banks do not have the capacity to absorb such a switch if everyone did it. And many borrowers, maybe as many as one fifth, do not have the financial strength to justify getting the lowest 'special' rates.

Still, that will leave most who are not getting the best lower rate. And in a rising market, they could prioritise such a shift. Remember, there will be little penalty in breaking a fixed rate loan in a rising interest rate market.

That still leaves us with the conclusion that at least $1 bln per year could be saved just by negotiating the rate harder, down to the lowest cost offers. To do that successfully, you need to be prepared to actually make the shift if a main bank calls your bluff (and most do).

It is only your money.

The latest rates are here. Our break fee calculator is here.

Use our unique double mortgage calculator below to directly compare two options.