What is the mortgage loyalty tax?

The term “mortgage loyalty tax” refers to the difference in interest rate costs that existing borrowers pay as a result of lenders offering new customers lower rates on home loans.

While not an actual tax per se, customer loyalty and refinance complacency is exploited by lenders on the premise that existing borrowers continue paying down their mortgage at the applicable variable interest rate, without attempting to secure a better loan.

In short, this means lenders anticipate that existing home loan customers won’t attempt to refinance.

How to find out if you’re being charged a loyalty tax

To determine whether your existing home loan is being charged at a higher rate than new customers, you can use RateCity’s handy tables and search filters to compare home loan interest rates.

Check the interest rates against what you’re currently being charged and factor in any difference in fees, loan features and any additional costs (e.g. switching or exit fees) to see if you’d be better off.

You could also contact your current lender to find out what other options are available, such as refinancing, and to see if they’re offering new customers cheaper rates for similar loan products.

How much more are loyal customers paying?

The Australian Competition & Consumer Commission’s (ACCC) Home Loan Price Inquiry 2020 found that a significant number of borrowers could save money by seeking a lower rate from their existing lender or switching to a new lender.

“There are factors standing in the way of home loan borrowers switching lenders, such as a lack of clear and transparent pricing, as well as inconvenience and time costs, but for many borrowers switching will be worth the effort,” according to the report.

“If you are someone with an older loan, you might be surprised to know that borrowers with new loans are likely walking into the very same lender you have your loan with and getting significantly lower interest rates.”

The following tables highlight the difference between new and current interest rates among the Big Four banks over the past year, including a comparison of two and three-year fixed term rates.

New customer variable rates:

Two-year fixed rates:

Three-year fixed rates:

Source: RateCity data, accurate as of 27/03/2023.

How to avoid paying a mortgage loyalty tax

The only way to avoid paying a premium on your mortgage is to shop around for a better home loan.

Existing borrowers have two options when it comes to securing a lower interest rate on their home loan:

• Request a lower rate from your current lender: If your bank is offering better interest rates for new customers, you may be able to negotiate a lower interest rate and/or improved loan features and terms. You can do this by directly contacting your lender by phone or email. To learn the four steps involved in asking for a lower rate and for a script of what you might say, check out our comprehensive guide to Asking for a rate cut.
• Refinance: If your bank won’t play ball, you can compare the market to find a lower interest rate and/or improved loan features. Be aware that switching home loans can be a costly exercise, so make sure you find out all the fees and charges involved to exit from your existing loan as well as setting up a new one. Additionally, you don’t want to end up extending your loan term if it means paying thousands of dollars more in interest over the life of the loan.

While many banks impose a mortgage loyalty tax a small number of home loan providers offer loyalty discounts as an incentive for borrowers to stay, rather than switch to another lender. These can include rate discounts to borrowers that have held the loan for a certain period of time - for example, you could be offered a small rate discount after five years, which may apply for the rest of your home loan’s term, even if the variable rate rises or falls.

If you can’t seem to improve your loan situation, it may be worthwhile discussing your options with a mortgage broker or home loan specialist to see if they can offer any advice that may be helpful to your financial situation and goals.

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