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Banks Impose Home Loan Loyalty Tax On Existing Customers

Loyalty tax

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The experience of mortgage broker What If We Finance shows existing borrowers are generally being charged rates 0.29 basis points higher than new borrowers. The analysis from January to November revealed that banks and lenders have been focused on attracting new clients rather than prioritising existing clients. This loyalty tax imposed on borrowers has made it difficult for existing borrowers to, and they generally pay more on their home loans.

As per the AFR, banks earn an extra $4.5 billion annually through this loyalty tax. To put this in perspective, 0.29% pa on a $700,000 loan equates to $2,030 per annum or $60,900 over the life of a 30-year loan.

While there are slight improvements, existing borrowers still faced rates 0.29 basis points higher on average than new borrowers as of November 2023, compared to 2022’s median lender loyalty tax across all lenders, which was approx. 1.25 basis points.

What Does The Mortgage Broker Say?

What If We Finance believes although the 29 basis points or 0.29% does not sound significant, refinancing your home loan or speaking to a mortgage broker can save you at least one rate increase of 0.25% if the loyalty tax impacts you. It is even more important now to monitor your home loan; this is where a home loan health check can help.
Various factors impact why existing customers need help getting a better deal. These include:

  1. Many lenders do offer discounts until a discharge request is initiated. This is not a great practice and is generally designed to make switching too hard.
  2. Government fees, charges, and Lenders’ Mortgage Insurance make switching too hard.
  3. Some lenders, like Commonwealth Bank, do not have competitive mortgage retention pricing. These lenders also try to steer customers away from brokers, which may limit their discounts.
  4. Banks make it too hard, which is where a mortgage broker can help.
  5. Some clients do not know. On average, your broker should review your home loan every 6-12 months.

According to What If We Finance, the recently announced home loan pricing review relaunch may expose these practices.

Mortgage broker explains loyalty tax

Why Are Customers Not Refinancing?

However, some clients may need help refinancing due to high loan-to-value ratios (LVRs) or insufficient income to support a lower-rate loan. Economic analysis revealed that the median income for borrowers fell by 3 per cent to $95,000 throughout 2023, despite a 40 per cent increase in variable mortgage rates for owner-occupiers, amounting to $528 extra per month on a $500,000 irregular principal and interest loan. Additionally, only 4 per cent of new purchases were made in the 95-100 per cent loan-to-value ratio (LVR) range, with 2 per cent more buyers purchasing in the 70-80 per cent LVR band than in 2022.

Given these challenges, What If We Finance has been conducting rate reviews, assuming the client’s bank allows it, to perform a comprehensive market comparison of all lenders and recommend potential refinancing options. Homeowners must challenge the status quo and reclaim their agency to ensure they receive the best deal in a challenging market.

Contact What If We Finance today to find an unbeatable deal. Visit us now. 

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