How to avoid paying the 'loyalty tax.'

The cost of loyalty

As the Reserve Bank of Australia continues to raise interest rates, lenders are passing higher borrowing costs onto existing home loan customers while they seek to attract new customers with lower rates.

The so-called "loyalty tax" is referred to as the gap between pricing on new and existing home loans. This leads to long-term customers paying higher costs compared to new customers, as banks offer discounted rates to new borrowers in order to increase their loan book.

A recent study has shown amongst the big banks, existing customers are charged 91 basis points above new customers, or 81 basis points more when compared across the whole banking sector.

That equates to approximately $4.5 billion each year being earned by the banks as a result of the loyalty tax.

What does that mean for you?

Borrowers that have been a customer to the same bank for several years are likely to be paying more than they should each month. To illustrate this issue, let's consider two customer's with same financial circumstances.

Customer 'A' and 'B' both have $500,000 left owing on their home loan. Customer 'A' has been with Bank X for the past five years and is being charged 4.91% p.a., meaning their repayments are $2,657 per month. However, Bank X is offering new customers a discounted rate of 4.00% p.a. Customer 'B' refinances to Bank X and is charged $2,387 per month.

That's a saving of $270 per month!

What can you do about it?

Ask for a lower rate. You may be fortunate enough to obtain a reduced interest rate simply by calling your lender. We recommend you do your research before making that phone call. Find out what competitors are offering new customers and ask your bank to match it. If they don't offer you a decent rate, look elsewhere.

The issue with seeking a price reduction is that the discount is rarely the same as what is offered to new customers, which is why so many borrowers opt to refinance to a competing lender.

Significant savings over the life of your loan can be achieved by regularly reviewing your mortgage and refinancing to a more suitable home loan.

As you continue to pay down the balance of your home loan, you will accrue equity and reduce your loan to value ratio (LVR). A favourable repayment history and low LVR, will often lead to greater discounts on the final rate offered by a lender.

Your mortgage broker will also compare thousands of home loan products and negotiate a lower interest rate on your behalf.

While the cost of living continues to rise putting more stress on borrowers, be aware your bank has a priority to it's employees and shareholders to generate high profits, at your expense.

Don't leave potential savings on the table, review your home loan regularly to find out whether you could save more.

If you need help comparing your home loan, speak to a trusted mortgage broker.

Want to save more on your home loan?

Get in touch with a mortgage specialist today.