When home loan rates rise, remaining loyal to your lender may cost you significant money. Although you may plan to stay in your current home or investment property for an extended period, holding onto the same mortgage year after year could benefit your bank while harming your finances. A well-known fact is that many lenders reserve their most favourable home loan rates for new customers.
According to data from the Reserve Bank of Australia (RBA) from August 2022, the average variable rate for established home loans was 4.44%, whereas the average rate for new loans was only 3.96%. This discrepancy implies that loyal customers pay an average rate penalty of 0.48% for staying with the same lender.
This disparity between the rates of old and new loans is known as the ‘home loan loyalty tax,’ which the RBA identified in early 2020, stating that “older mortgages tend to have higher interest rates than new mortgages.” This discrepancy enables the big banks to earn billions of additional profits yearly. Furthermore, given that interest rates are projected to rise, none of us can afford to be complacent about our mortgage interest rate.
What is Loyalty Tax?
The term ‘loyalty tax’ does not refer to an actual tax but rather to the additional amount you may pay if you are excessively loyal to your home loan lender. This can happen when lenders charge their existing customers a higher interest rate than new customers. Lenders assume that once you have settled on your home loan, you will not continuously compare your rate to ensure it remains competitive. Additionally, lenders assume that borrowers who believe they could obtain a better deal elsewhere will not bother to refinance due to the hassle involved.
To determine if you are paying a loyalty tax, it may be helpful to compare your interest rate with the rate your lender offers new customers. Your local Aussie Broker can assist you in determining whether your lender is charging a loyalty tax on your loan.
If you discover you are paying a loyalty tax on your home loan, you may want to calculate how much money you could save by switching to a lower interest rate. Even a reduction in interest rates by 0.5% could save you hundreds of dollars per month. Refer to the table below for an idea of how much money you could save.
To avoid paying a loyalty tax, there are a few steps you can take to take action on your home loan:
Speak with your lender about lowering your rate
Your first option to obtain a lower interest rate is to negotiate with your lender. It may be helpful to compare your interest rate and the rate offered to new borrowers. You can ask your lender to match the new borrower’s interest rate.
Let a broker can negotiate on your behalf
It’s worth noting that demonstrating a reliable repayment history and a good credit score may help persuade your lender to lower your interest rate. However, the interest rate you can negotiate with your lender may not be their lowest possible rate or the lowest rate available in the market. If this is the case, refinancing your home loan with another lender might be worth refinancing.
Refinance with another lender
Switching lenders could be a good option for securing a lower interest rate. Before deciding, do plenty of research to compare lenders and their loan products. This can be overwhelming, so it’s worth considering a broker to research for you to find a loan that fits your needs. It’s essential to evaluate all aspects of a home loan before refinancing. While the loan may have a lower interest rate, it might come with higher fees or fewer features than your current mortgage. It’s also important to note that you can expect to pay some refinancing fees.
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