As interest rates continue to rise unabated, many of our clients are finding that things are getting tight. They are wondering what to do. Well, the first step for many people is to see if you can reduce that rate of interest.
The basic rule here is that there is never any harm in asking your current lender to simply give you a better rate. In many cases, if they can, they will.
Consider a recent example of a couple with two loans: a principal and interest home loan and an investment loan. Both loans are secured against residential property, with quite a bit of equity. The couple sent a simple email to their lender, gently stating that they felt a little aggrieved that the lender had passed 12 interest rate rises on in full, and hinting that they were looking at other options. (Importantly, everything they said was true). They were very pleasantly surprised when the lender immediately came back to them with a proposal to lop a full percentage point off the interest rates payable on their loans.
It turns out, of course, that lenders are receiving quite a few queries from people asking the very same question. They are also seeing people move lenders to get better deals. And so they are ready for the question when you ask it.
Often, we don’t make a request like this because we are shy or we think it is impolite. But it isn’t. Especially if we ask it politely! The lender working at the bank negotiates interest rates with borrowers all day long. Asking them to re-negotiate with you is no less polite than asking a taxi driver to drive you somewhere. It’s their job.
We might also be reluctant to ask because we are scared that the answer will be ‘no.’ That is, of course, what the sign behind the counter tries to say: “Please don’t ask for credit as a refusal may offend.” But ask yourself: why should a refusal offend? Let’s say you ask your lender to drop the interest rate. They state simply: “I am sorry, but the rate you are paying is the lowest we can offer.” How is that offensive? In fact, given that now you know that you are paying the lower rate possible, you probably feel better.
Remember, someone saying ‘no’ is not even a loss. Let’s say you are paying 6% on your home loan right now. Your ask your lender to do better, and they say they cannot. So, you are still paying 6%. That means, of course, that you have not lost anything by asking. So, no in this case means ‘no change.’ Now ask yourself what about if the lender says yes, and shaves even a few basis points off the rate you are paying. Now you are better off.
So, asking for a better deal means (i) you can’t go backwards; and (ii) you might go forwards. That sounds like a sensible thing to do!
In fact, it reminds us of an approach known as Pascal’s wager. Blaise Pascal was a French mathematician back in the 1600s. He was also a bit of a theologian, and he argued that, mathematically, religious faith was the only sensible approach a person could take.
Now, religion is a personal thing, so we write here with our tongue a little bit in our cheek. But Pascal might have been on to something. Pascal pointed out that there are two ways to think about God: you either believe there is a God, or you don’t. And there are two realities about God: either God exists, or God doesn’t. Two possible beliefs and two possible realities give us four possible outcomes.
The first is that you believe in God and God exists. Presumably, at the end of your life, this gets you entry to whatever good place your God has to offer. In this case, believing in God gets you a good result.
The second possible outcome is that you believe in God and God does not exist. In this case, at the end of your life, nothing happens. In this case, believing in God does you no harm.
The third possibility is that you do not believe in God and God does not exist. In this case, once again, at the end of your life nothing happens. In this case, not believing in God does you no harm either.
The fourth possibility is that you do not believe in God and God does exist. In this case, you have taken quite a risk…
In summary, according to Pascal, believing in God might do you good but, in any event, cannot do you any harm. Not believing in God might not do you any good, but it might do you some harm. Given these options, belief is the only rational decision!
Now, religion is a personal matter and we offer the above as simply a light hearted way of pointing out that asking for a lower interest rate is a very similar situation. Asking for a cheaper interest rate might do you good but in any event, it cannot do you any harm. Not asking might not do you any good either. But it might mean you go on paying more interest than you need to. Asking can be good or neutral; not asking can be neutral or bad.