Are you too loyal for your own good? The banks think so
by The Advantage
5 October 2021
The average Australian homeowner is paying more than $37,000 in extra interest over the life of their home loan due to the loyalty tax, and it’s got three-quarters of borrowers feeling “ripped off” and “angry”.
What’s the loyalty tax?
It’s this sneaky lender trick where borrowers with older mortgages are typically charged a higher interest rate than borrowers with new loans, and it was confirmed in a study by the Reserve Bank of Australia (RBA) last year.
You see, the banks don’t think you’re paying attention, and as such, they only offer their lowest rates going to new customers in a bid to win them over.
For example, RBA June 2021 figures show the average difference in home loan interest rates between new and existing owner-occupier borrowers was 0.46%.
On an average loan size of about $400,000, that 0.46% difference on a 30-year loan means a borrower would pay an additional $37,462 in interest over the life of the loan.
That’s $1,249 per year, per household.
Athena Home Loans research estimates this costs Australian households a total of $9.1 billion per year.
Borrowers feeling ripped off and angry
It should come as no surprise then that 91% of borrowers want new and existing customers to receive the same rate, according to a survey of 1,000 homeowners undertaken by CoreData and commissioned by Athena.
The vast majority of those surveyed say they also feel “ripped off” (82%), “angry” (74%), and “outraged” (72%) at the opaque pricing practice.
“We know transparency is at the heart of trust. There is enormous opportunity for those lenders with clear pricing and a simple value proposition,” says CoreData Global CEO Andrew Inwood.
You don’t need to feel trapped
Now, the ACCC published a report in December 2020 with several recommendations to prevent this unfair practice, but nothing much has come of it since.
Meanwhile, more than half (56%) of those surveyed in the CoreData report say they feel trapped in their current deal, while one-in-three people (36%) asked their lender for a drop in their interest rate but were rejected.
But with competition among lenders quite fierce right now, it’s important to know the power is in your hands.
“Rates are at an all-time low at the moment, so it’s at a crucial time when Australians need the money in their pockets, not the banks,” explains Athena CEO and Co-Founder Nathan Walsh.
Adds the RBA: “Well-informed borrowers have been able to negotiate a larger discount with their existing lender, without the need to refinance their loan.”
Disclaimer: This is general advice and has been prepared without taking into account your particular situation or needs. You should consider whether it is appropriate for you before acting on it.