ARTICLE AT A GLANCE
In February 2020, RBA Governor Philip Lowe drew attention to the idea of a ‘lender loyalty tax’ when he urged Australian homeowners to shop around to avoid paying unnecessarily high mortgage interest rates by staying too long with the same lender.
While the concept of a loyalty tax is certainly not new, it has recently received renewed interest and media coverage as borrowers look for ways to save on their mortgages amidst rapidly rising interest rates.
This article looks at home loan loyalty tax, how you know if it affects you, and what you can do to avoid it.
What Is a Home Loan Loyalty Tax?
Despite the name, the home loan loyalty tax isn’t really a tax and has nothing to do with the ATO. It refers to the idea that your loyalty to your current lender could leave you worse off financially.
Lenders need to tread a fine line between retaining their existing customers and attracting new customers.
To do this, many lenders offer discounted interest rates on brand-new loans in an attempt to undercut their competitors and grow their client base.
However, existing customers don’t usually benefit from these discounted rates, so a loyal customer of many years could easily be paying a significantly higher rate on their home loan than a brand-new customer with the exact same type of loan.
For lenders, this situation is ideal; it means they can keep competing for new business while making a larger profit margin on their existing clients.
For borrowers, however, it can unnecessarily cost you thousands of extra dollars each year.
Do All Australian Lenders Charge a Home Loan Loyalty Tax?
All lenders can charge a loyalty tax, and many do – either regularly or just occasionally in an attempt to win new customers.
Often it’s the larger lenders that have more scope to aggressively discount rates for new customers, with recent data showing that home loan loyalty tax collectively nets the Big 4 Banks an extra $4.5 billion dollars annually.
However, this does not mean that smaller lenders are exempt from this sort of behaviour, which is why it’s essential to know that regardless of who your loan is with, you may well be paying a loyalty tax.
And although it’s outside the scope of this article, it’s essential to know that mortgage loyalty tax might affect more than just your home loan; you could also be paying it on your insurance, energy, mobile and internet, and many other services.
How Much Could I Be Paying in Australia for Home Loan Loyalty Tax?
You might be surprised at how much extra you pay on your home loan due to mortgage loyalty tax.
Canstar research from July 2021 showed that existing owner-occupier borrowers with variable-rate home loans could expect to pay an average of 0.33% more on their interest rate than new customers. This equates to almost an additional $1070 per year in extra interest, based on a loan of $500,000 over a 30-year term with principal and interest repayments.
According to more recent RBA housing rate data from June 2022, the average gap between existing and new variable owner-occupied loans could now have grown to as much as 0.47%.
An ACCC report also raised concerns that the gap between rates for new loans vs existing customers worsens the longer the loan is held.
In a media release from 2020 highlighting their findings from their Home Loan Price Inquiry, they stated:
‘As loans age, the gap between the rates paid on older loans compared with new loans widens. Borrowers with loans over 10 years old were, on average, paying about 104 basis points (1.04%) more than the average interest rate paid for new loans.’
Why Do People Accept a Home Loan Loyalty Tax in Australia?
In our experience, many people simply do not realise they are paying a home loan loyalty tax in the first place.
When life is busy, it can be hard to keep track of your own home loan interest rate, let alone compare it to other options on the market.
When rates increase rapidly, as has been the case since May 2022, keeping track of your finances becomes even trickier.
However, this does not mean that smaller lenders are exempt from this sort of behaviour, which is why it’s essential to know that regardless of who your loan is with, you may well be paying a home loan loyalty tax.
In fact, some banks only adjust repayment amounts once a year on the loan anniversary date, regardless of how often the rate increases during that period. This could mean your loan repayments seem artificially low until there is suddenly a HUGE increase in repayments all at once.
In other cases, some people are aware that their current home loan rate isn’t great, but the thought of refinancing or changing banks just seems like too much hassle.
Lenders are well aware that most people are willing to pay a bit extra for good service or the convenience of staying put, so they are often less willing to compete on price or negotiate rates for existing customers.
How Do I Know I am Paying a Home Loan Loyalty Tax?
If you’ve been with your existing lender for several years, there is a very high chance that you are paying a mortgage loyalty tax.
The quickest and easiest way to know for sure is to speak with a reputable finance broker, such as NBS Home Loans.
A broker can quickly and easily compare your current interest rate against other rates on the market and let you know whether your rate is still competitive.
It is especially important to chat with your broker as your loan size decreases, as this is one of the easiest ways for most people to avoid paying home loan loyalty tax.
As you pay off your home loan and/or your property value increases, your LVR (loan-to-value ratio) decreases.
When applying for a new loan, lower LVRs tend to attract lower interest rates as lenders see them as less risky.
However, your existing lender is unlikely to automatically lower your rate just because you’ve paid off more of your loan. In this situation, you could be at a significantly higher rate by staying with your current lender because your rate is set based on the loan’s original value.
Is There Anything I Can Do About a Home Loan Loyalty Tax in Australia?
It is vitally important to review your home loan at least every two years to ensure it’s still a good fit for your needs, even sooner if your circumstances change.
This does not mean you need to change lenders this often, as there are pros and cons to be considered for each client, but regular home loan health checks put you in the best possible position to avoid unnecessary costs.
At NBS Home Loans, we can check your current rate and compare it against a range of options from over 40 lenders to ensure you are still getting a great deal and not missing out on any savings.
If your current rate leaves something to be desired, but you are otherwise happy with your current loan, the first step is to attempt to negotiate with your existing lender. In some cases, they may be willing to come to the party and offer you a special rate to keep you as a customer.
If you are unhappy with your current lender, or they can’t offer you a more competitive rate, it can often be worthwhile refinancing to another lender to take advantage of a better offer.
Is Refinancing For a Better Interest Rate Worthwhile or Is It Just Too Hard?
Refinancing doesn’t have to be daunting.
NBS Home Loans will do all the ‘shopping around’ for you and recommend alternative loan options that meet your needs and circumstances.
While it’s true that you will still need to provide detailed information and supporting documents to your broker, we make this as easy and stress-free as possible, and we use this information to put together a loan application on your behalf when you are ready to proceed.
There is also a misconception that refinancing is expensive.
While it is true that there are generally some costs involved, which commonly include a mortgage discharge fee payable to your current lender and an establishment fee payable to your new lender, we will provide you with calculations comparing your overall financial position with these costs factored in (along with any cashback incentives offered by the lender for refinances).
NBS Home Loans will only recommend a refinance where it can be reasonably expected that you will be better off overall by making a move.
Generally, there is no cost to use our services except in very special circumstances, which will always be disclosed to you from the outset.
What If I Can’t Avoid a Home Loan Loyalty Tax in Australia?
In some cases, the reality is that you may need to stay put with your current lender for the time being, even if they are charging you a home loan loyalty tax.
This may be because your financial situation has recently changed and you would not be an ideal candidate for a new loan at the moment, or because your current lender is still the best fit for your particular circumstances regardless of their rate (e.g. they may be the only one offering a specific product you require, or maybe the only one operating in a certain market niche).
Even if you think this is the case for you, it is still worth speaking with NBS Home Loans to check for any suitable alternatives.
People are often surprised to learn that they have more options than anticipated. Lender policies and products are frequently reviewed, and new lenders often enter the market so things can change rapidly in the lending world.
We will be upfront and honest if your best option is to stay put with your current home loan for now, and we will continue to review your situation regularly to compare options.
What’s Next? Maybe It’s Time To Review Your Home Loan!
It’s essential to review your home loan regularly.
Home Loan reviews should be done at least once every 1-2 years or more often if your circumstances change.
Regular reviews allow you to check that you are not paying any unnecessary loyalty tax and help ensure that your current loan is still the right fit for your needs, regardless of the rate.
NBS Home Loans will help you weigh up the choice of lenders and products to find a home loan that is a great overall fit for your needs, and offers a competitive interest rate.
NBS Home Loans has written a helpful article for Australians on UNDERSTANDING INTEREST RATES, expanding further on our information here: https://www.nbshomeloans.com.au/understanding-interest-rates-in-australia-in-2022/
At NBS Home Loans, we have over 20 years of lending experience and are passionate about helping first-home buyers into their own homes.
If you have questions about home ownership as a First Home Buyer or want to organise an obligation-free chat about reviewing your home loan, contact us today on 0434 103 326.
For an up-to-date overview of the current rates on offer, visit our Facebook page at facebook.com/NBSHomeLoans