The ACCC found that borrowers with loans three to five years old were paying about 58 basis points more than new borrowers, and those over ten years old about 104 basis points more. On a $750,000 loan, 58 basis points is roughly $4,350 a year.
I spent years inside two of the big four before I started Loan Lounge, and here is the thing nobody in a branch will say out loud: the customer who has been with the bank for twelve years and never asked for anything is the bank’s favourite customer, and the reason is that on average she’s paying more than the new ones.
That’s not a conspiracy theory. The ACCC measured it.
How much is the loyalty tax?
The ACCC’s Home Loan Price Inquiry final report came out on 5 December 2020. Its finding was that, as at September 2020, borrowers with loans between three and five years old were paying on average about 58 basis points more than the average rate on new loans. Borrowers with loans more than ten years old were paying about 104 basis points more.
On a $750,000 loan, 58 basis points is about $4,350 a year. A hundred and four is about $7,800. Every year.
The ACCC’s recommendation was that lenders be required to prompt borrowers whose loans were more than three years old to review their rate. So the competition regulator thought the only way to get banks to tell loyal customers they were overpaying was to force them to.
Why it works this way
Banks price for the customer they’re trying to win. New business gets the sharp rate, the cashback, the waived fee. Existing customers get whatever their rate has drifted to. It’s just what happens when one side of a contract can reprice and the other side has to make a phone call.
And most people don’t make the phone call. Life gets in the way. The loan settled, the boxes got unpacked, and six years later the rate is a number on a statement nobody reads. We see clients who have been with the same lender since before the last round of cuts and have genuinely never looked at their rate. They assume it’s fine because the bank has never said otherwise. Of course it hasn’t.
Does loyalty to your bank count for anything?
That’s the sentence I hear most, and I understand it. There’s a feeling that the relationship should count for something, that the bank will look after you. In my experience, the bank looks after the people who ask. If you ring and say you’ve had an offer elsewhere, a retention team will often find a rate they couldn’t find last week. That tells you the rate was available all along.
Loyalty is a virtue in friendships and marriages. In a mortgage, it’s a line item on the bank’s profit and loss.
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Why does a small gap matter over time?
The extra 58 basis points is about $4,350 in a year at a $750,000 balance. The balance comes down over time so the dollar figure does too, but the gap keeps costing you every year it stays open, and money you’d have put into the loan instead would have been reducing the principal you pay interest on. Over the years left on a long loan, a gap that looks small in year one adds up, which is what the “tax on your future” in the title means.
I’d put a figure on it but the honest figure depends on your balance, your term and the size of the gap, so it’s one for a calculator with your numbers in it.
What “reviewing” actually involves
Less than people think. It’s a conversation, a look at your current rate against what the market’s doing, and then one of a few outcomes.
One, your rate’s competitive and you stay. This happens more than you’d expect and it’s a fine outcome. You’ve checked.
Two, your rate’s off and we go back to your current lender for a repricing. No refinance, no new loan, no valuation, just a better number on the same product. Lenders do this because they’d rather keep you at a smaller margin than lose you.
Three, the current lender won’t move enough and you refinance. Two to three weeks, sometimes longer, and there are costs (discharge fee, possibly break costs if you’re fixed, new lender’s setup fees) that have to be weighed against the saving. Sometimes the numbers don’t stack up and we say so.
The whole thing takes an hour of your time at the start. We book annual reviews with clients and we’re upfront about why: brokers are paid a trail commission for as long as your loan stays where we put it, so if you leave because we went quiet, we lose. That’s a self-interested reason to keep your rate sharp, and I’d rather own it than pretend it’s altruism.
When should you review your loan?
If your loan is three to five years old and you haven’t had a proper look at the rate, you’re in the bracket where the ACCC found an average gap of 58 basis points. If it’s more than ten, you’re in the 104 bracket. Those are averages. Some people are fine. Some are a long way worse.
The question is whether your bank is being loyal to you, and the only way to find out is to check. Call 02 9037 2825 or book a review with one of the brokers. Bring your latest statement.
Frequently Asked Questions: Loyalty to Your Bank Is a Tax on Your Future
What is the loyalty tax on a mortgage?
The gap between what new borrowers are offered and what existing borrowers keep paying. The ACCC measured it at about 58 basis points at three to five years.
How do I find out if I am overpaying?
Ask your lender for your current rate and compare it against what they advertise to new customers on the same product. That gap is your answer.
Do I have to refinance to get a better rate?
Often not. Lenders will frequently reprice an existing loan rather than lose it, which means no new application and usually no valuation.
Further reading: the government’s Moneysmart guidance on switching home loans.
Related reading
- The 5 C’s of Credit, Explained
- The Fixed-Rate Cliff Is an Opportunity, Not a Crisis
- Self-Employed Isn’t the Problem, Your Loan Structure Is
- More on self-employed home loans
Book a broker or find a broker near you. Or call the Burwood office on 02 9037 2825.
General information only. This article does not take your objectives, financial situation or needs into account, and is not financial product, tax or legal advice. Lending criteria, fees and rates vary by lender and change without notice. Loan Lounge, Australian Credit Licence 515608.