Sitting down and watching the interest rate on your home loan go up can cost you hundreds of extra dollars a month needlessly.
Homeowners are being warned not to fall victim to the “mortgage loyalty tax” by staying with an existing lender as banks offer discounts and perks to compete for new customers.
Analysis by RateCity shows that all four of the big banks offer new customers a much lower variable rate than existing customers who haven’t “bargained” for something better.
The financial comparison site found that someone who took out a variable rate loan in September 2019 could pay an interest rate nearly a full percentage point higher than a new customer today.
Looking at Australia’s largest bank as an example, RateCity estimates that a Commonwealth Bank customer who took out a $500,000 loan three years ago would have paid an additional $5,101 in interest during that time if he had not negotiated.
For a $750,000 loan, the interest is $7,652 and for a $1 million loan, the interest is $10,202.
RateCity explained that in those three years, the bank offered discounts at its lowest five times variable rates to new customers, meaning that unless an existing customer contacts their bank and negotiates each time, they lose 0.93 percentage points of their rate.
Speaking about RateCity’s results, the Commonwealth Bank said in a statement that it is committed to providing existing and new customers with “a range of flexible and great value home loan products”.
She highlighted the “Green Home Offer” where existing customers can access a standard low variable rate if their home meets certain sustainability and energy efficiency criteria.
“We encourage our clients to reach out to us to find out how our extensive network of home lending professionals can help them find the right solution for their needs,” a CBA spokeswoman said.
The Reserve Bank of Australia increased its official cash rate by 0.50 per cent on Tuesday – the fourth hike in four months.
While the major banks have fully passed the rate increases to existing customers, they still offer discounts to bring in new business.
Sally Tindall, director of research at RateCity, said banks are “falling apart” to offer discounts and concessions to borrowers wanting to move on from a competitor.
“Once the August increases are liquidated, the competitive interest rate for resident owners is likely to be around 3.50 percent,” she said.
“If your variable rate starts at 4 or even 5, you really have to wonder why.”
RateCity found that at least 10 lenders have lowered variable rates since the increases began, but only for new customers.
The value of refinanced loans rose $1.06 billion to $18.16 billion in June, according to the Australian Bureau of Statistics. This is the highest value recorded.
In addition to higher interest rates driving mortgage customers to shop, Tindall said many borrowers will be exiting the lower fixed rate contracts they signed up for during Covid.
“Refinancing hit a record high in June and we expect this to continue to rise as borrowers take out their fixed loans, only to find that rates have crossed the line since they last looked at a mortgage,” she said.
“This, in turn, will lead banks to offer more discounts and concessions to new customers, particularly refinancing companies looking to jump out of a competitor.”
Customers also have the option to call their bank and negotiate a better interest rate.
“If you go this route, do your research before making the call,” Tindall warned.
“Check your rate, check the rate your bank is offering to new customers, as well as what other lenders might want to offer you.
“If you have a quote ready for some of your bank’s competitors, they will probably notice.”