Should you be rewarded for your home loan loyalty?

These days it pays to be a loyal customer. More and more companies, including home loan lenders, are realising the importance of customer retention because of the competitive Australian market. In order to keep their customers from looking and going elsewhere they need to offer further incentives to keep their customers loyal.

Some lenders offer loyalty discount deals to their home loan customers as an incentive to retain their business. These deals often include a rate discount after a few years for borrowers that stay with the lender rather than switch to another provider.

An example of a loyalty discount deal is one which cuts its rate by 20 basis points from 7.20 to 7.0 percent after, say three years.

Half-way through 2011 the number of lenders offering loyalty discount deals on home loans almost doubled compared to six months earlier, as more providers rewarded home loan customers for not taking their business elsewhere.

One reason for the growth in number of these types of loans was that a proposed new law, which abolished excessive early exit fees, was given the green light for July 2011. Under the new law, lenders would not be able to slug customers with hefty fees if they switched to another lender. As a result, institutions were forced to find new ways to retain customers.

Prior to this, there were a small number of loyalty discount deals available in the market. However, the number is expected to increase in time as more lenders offer incentives to retain business.

In today’s competitive lending market borrowers are spoilt for choice and are conducting their own home loan comparisons. As there are no exit fees, unless you are locked into a fixed rate loan, in which case break fees still apply, you now have the freedom to take your business elsewhere.

So should you consider a loyalty discount or shop around for a better interest rate with another lender?

Are loyalty discounts the cheapest?

There’s no doubting the fact that a loyalty discount deal is enticing, given that most other deals offer discounted rates upfront then revert to a higher rate – in the case of intro rate mortgages. But like introductory rate home loans, loyalty discount deals aren’t necessarily the cheapest option on the market.

Instead, you may find that by selecting a low interest mortgage from the start of the term is a better deal in the long run. It’s easy to compare the two options, simply by looking to the comparison rate, which is inclusive of fees.

For instance, compare two mortgages – one with a variable rate of 6.69 percent (comparison rate of 6.81 percent) and a loyalty discount deal with a rate of 7.30 percent and 6.50 after five years (comparison rate of 7.09 percent).

While the loyalty discount deal has a better ongoing rate than the variable option, when you take into consideration the comparison rate, the variable rate mortgage is the cheaper option overall. In dollar terms, the interest charged on a $300,000 mortgage over 25 years is around $16,000 more with the loyalty discount deal than if you chose the low rate home loan. So clearly, if pays to look beyond clever marketing and crunch the numbers so you know exactly what you’re spending.

See beyond the marketing ploys and crunch your own number with the RateCity home loan comparison tool and the home loan repayment calculator.

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