What is a "loyalty tax”, and how can I avoid paying it?
Imagine that you’ve been a loyal customer of a lender for many years, getting charged a certain interest rate on your home loan. Then, you find that your lender has been offering new customers much better rates whilst slowly increasing the mortgage rate on your home loan. If it sounds like this might be unfair, you aren’t alone.
Finance
Imagine that you’ve been a loyal customer of a lender for many years, getting charged a certain interest rate on your home loan. Then, you find that your lender has been offering new customers much better rates whilst slowly increasing the mortgage rate on your home loan. If it sounds like this might be unfair, you aren’t alone.
Similar scenarios unfold daily at banks and lenders across Australia. In the mortgage broking industry, it’s referred to as the loyalty tax.
What is a "loyalty tax" in Australia?
Loyalty tax is the premium interest rate you pay for being loyal to a lender.
This refers to when lenders reserve their lower interest rates for their newest customers whilst older customers are stuck with rates that slowly creep up. This is because lenders know that many borrowers will accept the rate of their current loan, whilst better deals are needed to entice potential customers to their business.
Recent research from the RBA has even found that the difference between new and old interest rates increases throughout the length of the home loan. This means that the longer you stay on your home loan, the higher your ‘loyalty tax’ may be.
How do I know if I'm paying a loyalty tax on my current home loan?
Even if you have only been with your current lender for a couple of years, you may be paying a loyalty tax. This will be particularly relevant for borrowers on a variable-rate home loan.
Luckily, it’s easy to find out if you’re paying a premium interest rate. Through your lender, find the rates currently offered to new customers and compare them with your own. If there is a significant difference between the two, you’re likely paying a loyalty tax.
How do I avoid paying a loyalty tax on my home loan?
Before you panic and switch lenders, you should first get in touch with your current lender and ask them to review your home loan. If you’ve found lower better deals offered to newer customers and from other lenders, you’ll be able to make a strong case for yourself.
In the finance industry, the squeaky will gets the grease. Lenders want to keep your business and will often agree to a reduced interest rate or risk losing you as a customer. This is where using a mortgage broker will be crucial. A good mortgage broker will use their negotiating skills and finance expertise to facilitate the best possible deal for your mortgage.
If your lender is unwilling to offer a better rate on your home loan, don’t be afraid to switch your home loan to a lender that will.
How much can refinancing save me?
Of course, this will depend on your individual circumstances.
A report from the Australian Competition & Consumer Commission in 2020 found that the average gap in rates between new and old loans grows over time:
0.29% difference on loans less than one-year-old
0.47% difference on loans between one and three years old
0.58% difference on loans between three and five years old
0.71% difference on loans between five and ten years old
1.04% difference on loans more than ten years old
What would this mean for your mortgage repayments? For a borrower on a $500,000 loan with 20 years remaining, a 1.04% higher rate would mean an additional $263 in mortgage repayments every month. This adds to $3,156 annually!
If you want to find out how much a lower rate could save you, use of free refinancing calculator to compare different rates and refinancing options.
Why don’t customers refinance more often?
The biggest reason is the most obvious one; refinancing can be a hassle. Maybe it's just easier to stay with your existing lender and not worry about your home loan terms? Sadly, this is what lenders are banking on, and it’s the reason why so many borrowers get stuck paying excessive interest costs.
Using a mortgage broker is a great way to deal with this problem. A mortgage broker can handle all of the paperwork, negotiating, and bank jargon for you - plus their services likely won’t cost you a thing!
Don’t be scared of refinancing; it could save you thousands from loyalty taxes.
In fact, we recommend that our clients review their interest rate every couple of years to ensure they are still getting the best deal on the market.
Unlike the process of purchasing a home, refinancing is a far less daunting experience. Without needing to deal with solicitors and real estate agents, you can let your lender and mortgage broker do the legwork for you.
If you are thinking about refinancing, please reach out to one of Elephant Advisory’s finance team members. We work on behalf of the client’s interest to make sure they’re getting the best mortgage rate possible—every time.
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