What is the loyalty tax?
Loyalty tax is a tax on loyal bank customers. It refers to the higher interest rates paid by existing home loan customers compared to new customers.
It is not a tax in the traditional sense, but rather a premium paid by existing customers.
The difference in interest rate paid exists because banks offer larger discounts to new customers compared to the lower discount offered to existing loyal customers.
How big is the loyalty tax for home loans?
According to the Australian Competition and Consumer Commission (ACCC)’s Home Loan Price Inquiry – Final Report, the average difference in interest rates paid by new and existing variable rate customers was:
0.29% for borrowers with home loans less than 1 years old.
0.47% for borrowers with home loans between one and three years old.
0.58% for borrowers with home loans three and five years old.
0.71% for borrowers with home loans five and 10 years old.
1.04% for borrowers with home loans greater than 10 years old.
As you can see, the difference increases the longer you stay with a lender.
Significant potential savings for borrowers
Borrowers are leaving significant potential savings on the table.
For example, if a borrower with a home loan of $500,000 switched to a home loan with an interest rate 58 basis points lower than their existing loan, they would save over $2,800 in interest in the first year and save over $34,000 in interest over the remaining term of the loan.
How do I avoid paying the loyalty tax?
The only way to avoid paying the loyalty tax is by shopping around and negotiating with your lender.
Existing home loan customers have two options before them, namely:
Requesting a lower rate: Customers may be able to obtain a lower rate on their current loan simply by calling their bank. Look at interest rates offered to new customers by your lender as well as a few competitors. Then contact your lender and tell them you’re paying too much. If they don’t offer you a decent rate, go somewhere else.
Refinancing: By refinancing to a new loan or a new lender, customers can take advantage of larger discounts which are usually not available for existing loans.
Why aren’t more people refinancing?
Refinancing seems like the logical choice but why are customers preferring to remain with their existing lender and get a smaller price reduction compared to what they could get by refinancing?
The initial cost of refinancing is minimal compared to the thousands of dollars that you may potentially save on interest and other fees over the life of the loan period.
And in some cases lenders offer cashbacks which can offset refinance costs.
The primary roadblock seems to be that customers do not have the inclination to spend time and effort to make the switch.
Refinancing isn’t as complicated as it used to be plus you have already been through the process when you first bought the property. This time there is no contract of sale to go through, no solicitors and real estate agents to talk to.
Are you paying a loyalty tax?
If you’ve been with your bank for more than 3 years, you’re likely paying too much.
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