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What is the loyalty tax and how can you avoid it?

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If you’ve been with a lender for many years, it’s natural to assume you’ll be rewarded for your loyalty. But as an Australian Competition and Consumer Commission (ACCC) inquiry found, this often isn’t the case – particularly when it comes to home loans.

Loyalty doesn’t pay

A loyalty tax is when lenders charge their existing customers higher rates than those offered to new borrowers.

The older your home loan, the bigger the difference. The ACCC found, as at September 2020, “borrowers with home loans between three and five years old paid on average about 58 basis points (0.58%) more than the average interest rate paid for new loans”.

This difference might not sound like much, but it quickly adds up over time.

According to the ACCC’s calculations, a borrower with a $250,000 mortgage could save more than $1,400 in interest in the first year by switching to a loan with the lower, average interest rate. Over the life of the loan, they could save $17,000 in interest.

While there are good reasons why new customers get offered better rates, you don’t have to put up with paying more than you should.

How to avoid paying the loyalty tax

If you got your home loan more than three years ago, there’s a good chance you’re paying too much. Here’s what you can do about it:

Request a lower rate from your current lender

Don’t be afraid to call up your lender to ask for a lower rate – particularly if your credit score is good and you’ve never missed a repayment. After all, the worst they can say is no.

Before picking up the phone, arm yourself with some research first. Find out what rate your lender is offering to new customers in a similar position to yours. Then, check out their competitors’ rates.

If all goes well, you just scored yourself a better deal. But, if your lender refuses to budge, consider walking away.

Refinance to a new loan or lender

Refinancing isn’t suitable for every borrower. But, for the right borrower, it could save you a considerable sum in interest over the life of your loan while also lowering your monthly repayments.

For example, imagine you have $500,000 left to pay on your mortgage. You’ve been with your current lender for five years and are being charged 3.78% (the ACCC’s average three- to five-year rate):

  • Monthly repayments = $2,371
    • Interest charged over the 25-year life of the loan: $273,648 

Switch to the Well Balanced variable loan and pay 2.17% interest (comparison rate 2.20%):

  • Monthly repayments = $2,161
    • Interest charged over the 25-year life of the loan: $148,269

However, there are some upfront costs and fees to refinancing. So, it’s always a good idea to do your sums and get professional advice before jumping ship.

If you are considering a change of lender, Well Home Loans’ award-winning mortgages could be just what you need! Our fixed rates are some of the lowest on the market and even come with a 100% bank backed offset account.

NOTE: Rates current at the time of writing – January 2021. You can view all current rates here.

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