What is the home loan loyalty tax?

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Borrowers are no longer paying as high a price for their loyalty. So is there still a benefit in switching lenders?

If you've been loyal to your lender, chances are that you're paying more on your mortgage than you need to be.

home loan loyalty tax

That was one of the major takeaways of a 2020 report on home loan pricing published by the Australian Competition and Consumer Commission (ACCC).

The regulator found that borrowers with loans between three and five years old were paying a 58 basis point rate premium, on average, compared to those with new loans - a premium that, depending on the amount borrowed, could add tens of thousands of dollars over the life of a loan.

The difference between the interest rates being offered by lenders to new and existing customers is often referred to as the 'loyalty tax'. So does it still exist? Yes, is the short answer, but it's nowhere near as hefty as it has been in years past.

"In October 2022, new variable owner-occupied customers were, on average, receiving 0.51% better pricing than existing customers," says Angus Gilfillan, chief executive of digital mortgage broker Finspo.

"The latest Reserve Bank statistics for April this year show the loyalty tax has reduced to 0.11%. It's worth noting that 0.11% is the average and many Australians are paying a much higher loyalty tax."

Part of the reason for this, Gilfillan explains, is that many lenders have pulled back on the kind of aggressive pricing that they were offering to new customers during the pandemic period.

How can borrowers avoid paying over the odds?

Given the cost of repayments at the moment, it's understandable that many homeowners with a mortgage will want to ensure that they're not paying a higher interest rate than they need to.

When it comes down to it, Gilfillan says that borrowers will need to be proactive if they want to keep their home loans competitive. He says that, at Finspo, they recommend that their customers review their loans every year.

"The market is constantly changing, which is why it's important to stay on top of your home loan and compare your rate to what is available in market.

"You can either do this yourself by shopping around and seeing pricing you can get with other lenders, or get a broker like Finspo to do the heavy lifting for you."

Which banks have the lowest mortgage rates?

So for borrowers who are trying to get a sense of how their own home loan stacks up against the broader market, what does a competitive rate even look like at present?

Naturally there are a lot of factors involved, but Reserve Bank data suggests that lenders are charging an average variable rate of 6.40% p.a. at present to their existing owner-occupier customers, and 6.30% p.a. to their new customers.

As Richard Whitten, home loans expert at comparison website Finder explains, it's still possible to find a variable interest rate with a '5' at the front of it though.

"In terms of the most competitive rates, you're looking at around 6% or a touch under. We're seeing a lot of 5.99% p.a. offers at the moment.

"The lowest rates are from the online banks, small digital lenders and a lot of smaller banks and credit unions that most people maybe haven't heard of - ones that often operate in specific cities or states."

Renegotiate or refinance?

Mortgage holders who are unhappy with their current deal ultimately have two options available to them: renegotiate with their current lender or refinance to a new lender.

For those who are satisfied with their current lender but are after a better interest rate, attempting to renegotiate could be the first move to make.

Gilfillan says that it's certainly worth a try for anyone who hasn't asked for a reprice in the last 12 months, as lenders are often willing to cut a deal to keep customers.

"At Finspo, we provide existing customers with a repricing service, and the average reprice over the last six months has been a 0.43% reduction in their rate," he says.

Borrowers who are either unable to negotiate a satisfactory rate reduction with their current bank, or who are just wanting to move on, may want to think about refinancing to a new lender. Though it's worth noting that some mortgage holders won't be in a position to refinance.

Whitten says that that while the number of people refinancing has tapered off from the record volumes seen when rate hikes were a near monthly occurrence in 2022 and early 2023, it's certainly an option worth considering for those who haven't done so lately.

"Those rate rises were a strong motivator because anytime someone's rate goes up or they see rate rises on the news it's a really big motivator to switch. So a lot of people have switched recently.

"But most people aren't switching every year. So if someone hasn't shopped around or refinanced in the last couple of years, it's highly likely that they'll be able to get a better deal somewhere else."

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Tom Watson is a senior journalist at Money magazine, and one of the hosts of the Friends With Money podcast. He's previously worked as a journalist covering everything from property and consumer banking to financial technology. Tom has a Bachelor of Communication (Journalism) from the University of Technology, Sydney.