Are you being stung by the loyalty tax?

Once upon a time you were rewarded for loyalty. But borrowers with older loans are typically paying a higher interest rate than customers on new loans.

A recent RBA’s study finds that the difference in interest rates between new and outstanding variable-rate home loans increases with the age of the loan.

For example, for loans written four years ago, borrowers are charged an average of 0.40% higher interest than new loans.

“For a loan balance of $250,000, this difference implies an extra $1,000 of interest payments per year,” explains the RBA.

And for loans more than eight-years-old, on average, you pay about 0.60% more than a new customer today.

What’s driving the difference?

The difference in rates between older and newer loans can be partially explained by a shift in the mix of different types of variable-rate loans over time.

There has been a noticeable decline in interest-only and investor loans in recent years due to the APRA restrictions and these tend to have higher interest rates than other loans.

Strong competition for new borrowers

Here’s the real kicker, though. With competition for borrowers intensifying over recent years, banks are offering larger discounts on their standard variable rates (SVRs). We’ve certainly noticed the difference in interest rates over our 13 years in the industry.

What’s an SVR? It’s the reference rate that a bank prices its variable-rate loans against.

Basically, it’s the interest rate that banks and media quote when they report whether or not a rate cut is being passed through to customers.

But very few borrowers actually pay interest rates as high as the SVR.

Instead, most borrowers are on advertised rates that are “materially lower” than a lender’s SVR, or have negotiated a further discount – and those discounts are getting bigger and bigger each year.

“In recent years, the average discounts relative to SVRs offered by major banks on new variable-rate mortgages have grown, widening from around 1% in 2015 to more than 1.5% in 2019,” the RBA says.

“By increasing the discounts on rates for new or refinancing borrowers over time, rather than lowering SVRs, banks are able to compete for new borrowers without lowering the interest rates charged to existing borrowers.”

Time to renegotiate?

The discounts borrowers receive on loans are usually fixed over the life of the loan. However, the good news is that they can be renegotiated.

We regularly negotiate with the banks on our clients behalf to achieve interest rates much better than advertised.

We’d be more than happy to help you refinance your home loan, whether that be renegotiating with your current lender or looking around elsewhere.

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