Are you getting the best interest rate when renewing your mortgage?

Philip’s* mortgage with BNZ recently came up for renewal, so he decided to shop around for the best interest rate.

He found a good floating rate advertised with his own bank of 8.44%, but what he was offered was 8.69%. When he asked why he wasn’t offered the cheaper rate, he was told it was for new customers only.

While this was stated in the fine print, is it fair that existing customers should get a more expensive deal?

We look at why existing customers aren’t offered the cheapest deals, and the importance of haggling the next time your mortgage comes up for renewal.

Why don’t existing customers get the best rate?

Offering cheap rates to entice new customers is a common practice, says associate professor Claire Matthews, the acting head of the school of accountancy at Massey University.

“It's understandable to feel frustrated when you see new customers getting better rates, but this is actually a common practice across many industries, not just banking. It can be thought of as a way businesses attract new customers … hoping that once new customers join them, they'll stick around,” Matthews says.

Lending for mortgages is big business for banks. The Commerce Commission’s final report on personal banking identified it as the most important product for banks because of “the size of the portfolio and its contribution to overall revenue”.

In March 2024, home lending made up about 65% of total lending and around 53% of the total assets of banks in Aotearoa, the Commission’s report explains.

Mortgage customers are also valuable because of the range of other personal banking services they are likely to need. They also tend to stick with one bank once the mortgage is established.

Research by Consumer NZ confirms that people tend to stick with one bank and are reluctant to switch because they perceive it’s too hard. They’re more likely to open an additional account with a second bank, than leave their primary bank completely.

Haggle to get a better interest rate

If you do decide to stick with your current bank when your mortgage comes up for renewal, it pays to haggle to get the best interest rate deal.

The Commission’s personal banking study found that a lot of discretionary discounting goes on with mortgages. As a result, customers who contact the bank and question its rates, and those who shop around, are likely to get better deals.

“The fact that home loan interest rates are a negotiation has not been clearly advertised by any of the major banks,” the Commission’s study states.

Philip rang his bank to negotiate the interest rate and got the advertised deal.

“If you press them on the phone, which not every customer has the time or inclination to do, you can get a better rate, possibly – even if it is only marginal,” Philip says.

While he is happy to have the slightly cheaper rate, which could save him a substantial amount over time, he doesn’t feel like the bank was transparent throughout the process.

In the Commission’s report, the banks are quoted as saying that the interest rates they offer customers can depend on the individual circumstances.

However, Associate Professor Matthews says banks “don’t generally differentiate that much between home loan borrowers for their specific situation.”

“The banks will have a series of rates that apply for different sets of borrowers, reflecting the assessed level of risk, but they are not going to calculate a specific rate for each individual borrower.”

But if a customer haggles or looks to go elsewhere, the bank may discount the rate it initially offered.

How to get a better deal when renewing your mortgage

Shopping around will take some time but it’s likely a better deal is out there. Here are our tips for getting hold of it.

• Find a cheaper advertised mortgage interest rate with another bank that you are eligible for and ask your existing bank to match it.

• It’s even better if you can get the cheaper rate in writing. Having a competitive offer, based on your circumstances, shows you’re serious about taking your business elsewhere. This will be more time consuming and involve paperwork in making multiple loan applications, but it could save you money in the long run.

• Ask about any discount or cashback offers being advertised at renewal time.

• If you are prepared to shift your mortgage to another bank, ask your existing provider what fees are involved. There could also be legal fees, so it’s important to weigh up the cost of the various fees against potential savings from switching.

• Consider getting financial advice. You can find registered financial and mortgage advisors on the financial service providers register: https://fsp-register.companiesoffice.govt.nz/

It needs to be easier to compare rates

The Commission’s report recommended that home loan offers should be presented so customers can easily compare them. It also said that banks need to be more transparent about their pricing practices and policies.

The government plans to act on the Commission’s recommendations. If the banks take too long to implement the recommendations, the Commission could intervene.

The Commission has also recommended open banking as a way to make the sector more competitive. Open banking could also make it easier for people to compare banks and switch.

The Commission would also like to see Kiwibank be more of a competitor against the big four banks.

While these measures would probably have an impact on competition in the sector, any practical change is likely to be years away as open banking gets set up.

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*Surname withheld to protect privacy.