Home loan loyalty tax: What’s it costing you?


Loyalty is a great quality. But not always in a borrower. We look at how staying loyal to your lender can benefit your bank – and leave you out of pocket.

Sticking with the same lending solution can be an easy option. But it’s also likely to see you paying more than necessary on your investment property loan over the longer-term.

That’s because in today’s highly competitive home loan market, lenders often save their best deals for new customers. It means that despite being loyal to the same bank for many years, the next customer to walk through their doors could land a lower interest rate than you’re currently paying.

The older the loan, the higher the loyalty tax

The Reserve Bank of Australia (RBA) called out home loan ‘loyalty tax’ in early 2020, noting that “older mortgages tend to have higher interest rates than new mortgages”.

Home loan loyalty tax is not a new trend. Many lenders have been giving new borrowers a better deal than existing customers for the past four years. And research shows that the longer you’ve had your loan, the bigger the rate gap could be.

In late 2020, consumer watchdog – the ACCC – found that borrowers with loans more than 10 years old were paying around 1.04% more than the average rate on new loans.

Even if you’ve only had your investment loan for three to five years, the ACCC found you could be paying 0.58% more on the loan rate compared to a new loan.

The potential for significant savings

Fast forward to February 2022, and little has changed – at least in the variable rate market. In fact, the latest banking round-up from Mozo shows a number of lenders have actually dropped their variable rates in recent months. But new borrowers continue to pocket the lowest rates.

It’s a different story for fixed-rate home loans. New fixed rates crept upwards through late 2021, with several lenders continuing to implement rate rises into 2022. This is being driven by lender expectations that the RBA will raise the cash rate before the end of 2022, coupled with the US Federal Reserve setting expectations of multiple increases in its key rate.

The bottom line is that getting into the habit of regularly reviewing your loan brings the potential for valuable savings. Back in 2020, the ACCC crunched the numbers and found a borrower with a loan of $250,000 could save more than $1,400 in interest in the first year just by switching to a new loan with a lower rate, and enjoy further possible interest savings of over $17,000 across the remaining term.

Bear in mind, variable rates have fallen since the ACCC completed this analysis, so the savings could be even higher today.

Why wait?

Not surprisingly, a survey by non-bank lender Athena found plenty of Australians feel ‘ripped off’ that their loyalty to a lender comes at the cost of a higher rate.

Behind the scenes, the ACCC has recommended that lenders be required to prompt borrowers with loans older than three years to review their current rate and consider the possible benefits of refinancing.

While there can be valid reasons to stay with the same lending solution (for instance, in cases where the costs of refinancing outweigh the benefits), reviewing your property investment loan has the potential to deliver savings on interest, leading to improved cashflow and an uptick in net yields – all compelling reasons to set a habit of reviewing your loan.

Book your free review

At Momentum Wealth, loan reviews are an important part of our service offering as we want to ensure you continue to get the most out of your property finance.

If you would like to organise a free review of your existing loan solution to assess whether you could save money through refinancing, fill out the form below and a member of our team will be in touch.

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