Most people assume that sticking with the same bank year after year earns them a bit of goodwill. With home loans, the opposite is often true. Lenders compete hard for new borrowers with sharp advertised rates, then quietly leave existing customers on higher ones. Nobody writes to tell you your rate has stopped being competitive. This gap between what new and existing customers pay has a name, given to it by the competition regulator: the loyalty tax.
What the government actually found
This is not a marketing slogan. It came out of a formal government inquiry. The Australian Competition and Consumer Commission (ACCC) ran a Home Loan Price Inquiry from October 2019, and its findings were clear:
- As at September 2020, borrowers with home loans between three and five years old were paying, on average, about 58 basis points (0.58%) more than the average rate paid on new loans.
- The gap widened the longer a borrower stayed put, stretching to more than a full percentage point for loans over ten years old.
- The ACCC found that a borrower with a $250,000 loan could save more than $1,400 in interest in the first year alone by moving to the average new-customer rate, and Treasury noted savings of more than $17,000 over the life of a $250,000 loan, or more than $34,000 on a $500,000 loan.
The regulator also pinpointed why it happens. Headline advertised rates do not reflect what customers actually pay, because most discounts are discretionary and not published, which makes comparison hard. The ACCC found that close to 89% of big-four variable-rate home loans received some discount off the headline rate. Combine that opacity with borrower inertia, the natural tendency not to question a rate, and lenders have little pressure to keep long-standing customers on their best pricing.
Why it slips under the radar
The loyalty tax is quiet by design. Your repayments do not suddenly jump. Instead, the rate you signed up for slowly falls behind the market while you get on with life. Unless you actively check, the gap can widen for years without you noticing, and the larger your loan balance, the more those fractions of a percent add up.
What you can do about it
The good news is that the fix is straightforward, and largely in your hands. Drawing on ASIC’s Moneysmart guidance:
- Review your rate regularly. The ACCC recommended borrowers with loans older than three years be prompted to check their rate, so treat the three-year mark as a natural review point.
- Ask your current lender to do better. A simple call to say you are reviewing your options, and asking them to match what new customers are offered, sometimes moves the rate without you changing anything else.
- Compare properly and count the costs. Use Moneysmart’s Mortgage Switching Calculator, and factor in any exit, break or application fees so the savings genuinely outweigh the cost of switching.
- Consider refinancing. If your lender will not budge, moving to a more competitive loan may be worth it. A mortgage broker can compare lenders for you, and ASIC’s advice is to ask how the broker is paid.
How MS Financial Services can help
As Chartered Accountants with a licensed Lending & Finance arm, we can review your current rate against the market and, if a switch stacks up once the costs are counted, manage it for you. If it does not, we will tell you that too. To have your loan reviewed, get in touch with our team.
Frequently Asked Questions
What is the loyalty tax?
It is the difference between the interest rate a lender offers new customers and the higher rate existing customers often keep paying. The ACCC documented it in its Home Loan Price Inquiry.
How much more could I be paying?
The ACCC found borrowers three to five years into their loan paid on average about 0.58% more than new borrowers, rising to more than 1% for loans over ten years old. On a large balance, that can be thousands of dollars a year.
Does asking my lender for a lower rate actually work?
It often does. Because most discounts are discretionary rather than advertised, lenders have room to move, particularly if they know you are comparing options or considering switching.
Is refinancing worth the cost?
It depends on the numbers. Switching can involve exit, break or application fees, so the interest saving needs to outweigh them. Moneysmart’s Mortgage Switching Calculator is a good way to check before you commit.
Is there a law that stops the loyalty tax?
No rule requires a lender to give existing customers the same rate as new ones. The ACCC recommended that lenders prompt long-standing borrowers to review, but the responsibility to check and act still sits with you.