John McGrath – Are you paying the ‘lender loyalty tax’?
Last week I collaborated with one of Australia’s leading mortgage broking experts, Fabio DeCastro from Oxygen Home Loans to provide advice on how home owners and new buyers can best cope with rising interest rates.
This week we’re going to talk about the ‘lender loyalty tax’ that many borrowers don’t realise they are paying. It can end up being a significant sum over time – we’re talking many thousands of dollars the longer it goes on – but there is an easy way to avoid it.
The lender loyalty tax is what existing borrowers pay when the rate they’re on significantly diverges from the rates being offered to NEW borrowers by both their own lender and others in the marketplace. There are two ways to avoid it:
- Conduct a home loan health check with a mortgage broking professional once a year
- Be willing to leave your lender (this is called ‘refinancing’) if they won’t offer you a better rate that’s comparable with the one offered to new customers.
Check the interest rate you’re paying on your home and/or investment property loans right now!
Then immediately go to your lender’s website and compare your rate to the new customer rate on the same loan/s. You may find you’re paying somewhere between 0.25% and 1% more than new borrowers.
Why is that? Well, as an existing customer, the bank values you but not as much as new customers. That’s because new customers mean more market share and additional earnings for the bank. The banks count on our laziness (aka loyalty) to not keep track of new customer offers, and thus to remain with them in ignorant bliss while we continue to pay more than we need to over time.
So, every year, ask a broker to assess your loan, its rate and conditions, to see if you’re getting a satisfactory deal. If not, your broker can do a couple of things. They can recommend a new lender for refinancing so you can take advantage of a lower new customer rate, or they can call your bank to try to negotiate a discount. You can do this yourself, but it’s far better to have your broker do it because they always have more sway with lenders because they refer them a lot of new business.
Even a minor discount can add up. Say you have a $1 million loan and your broker negotiates an 0.25% discount – the equivalent of a typical Reserve Bank increase. That’s $2,500 in savings per year, every year, for the life of your loan from here.
As Fabio points out in our Q & A, competition between banks for new customers is still very strong, so there’s plenty of leverage there for existing borrowers to renegotiate or refinance.
JM: What is the competition between lenders like at the moment?
Fabio: The Australian mortgage market is very competitive with many lenders. Regularly, there are aggressive, great deals in the market. It’s always good to keep an eye out and talk to your broker. Remember, the loyalty tax is a real thing! Banks provide better rates to new customers than they do to existing customers. So, at least every year, contact your broker for a home loan health check.
JM: For a long time, fixed rates have been lower than variable rates. Can you explain why that’s now reversing?
Fabio: Fixed rates are a general indication of what the banks think future interest rates will be. If fixed rates are higher than variable (which is currently true), banks forecast future interest rates will be rising. Most people and organisations think interest rates will continue to rise consistently for the next year. Other immediate factors also play into interest rate pricing, notably the banks’ cost of funds. During the COVID-19 lockdowns, the Australian Government provided key banks with very low funding facilities to stimulate the economy, but this stopped mid-last year.
JM: What trends are you noticing at Oxygen?
Fabio: Right now, enquiries are high for refinancing. Most customers want to understand if their current rate is still the best fit for them. Investor interest remains high, especially in tight rental markets. We’re also seeing a lot of interest from owner occupiers for upsizing or downsizing – but they tend to be getting ready, awaiting what the first interest rate rise and the election does in the wider economy, before committing to anything.
JM: What are the top 3 benefits of organising a refinance or new loan through a broker?
Fabio: The Australian home loan market is complex, with thousands of products and hundreds of lenders. You need an expert on your side to review all options available.
Here are the top 3 benefits:
- Going direct to the bank you use for your savings or a credit card limits your options to that particular lender and gives no competitive tension for the best rate
- Fee-free service – in most cases, a broker’s services are free. They get paid by the lender when the loan is finalised
- Build a relationship – brokers are not transactional, they are relationship-driven. They are there to help with your current financials needs and will be there in the future as your circumstances change.
JM: Any other tips for our readers?
Fabio: Speak to your broker before major life events, so they can assist with putting a plan in place before a significant decision is made (i.e. maternity leave or purchasing an investment property).
The only way is up with interest rates today, so if you borrowed your money more than a year ago, it’s time for a home loan health check. Click here for more information on Oxygen or to use one of their 20 online calculators to assess your own financial situation.