Australians are often encouraged to shop around for a better deal on insurance, utilities and everyday expenses but when did you last compare your home loan?
Many homeowners stay with the same lender for years without checking whether their interest rate is still competitive. Meanwhile, their bank may be advertising lower home loan rates to attract new customers.
This difference is sometimes called the home loan loyalty tax. It is not an official fee charged by your bank. Rather, it describes the additional interest some existing borrowers may pay compared with newer customers receiving more competitive rates.
When even a small difference in your interest rate can add up over time, regularly reviewing your home loan could be well worth the conversation.
What Is the Home Loan Loyalty Tax?
Banks and lenders regularly compete for new home loan customers. To attract new borrowers, they may offer lower variable interest rates, introductory discounts, cashback offers or reduced fees.
Existing customers do not always receive these benefits automatically.
As a result, someone who has remained loyal to their lender for several years could be paying a higher interest rate than a new customer applying for a similar loan with the same bank.
The Australian Competition and Consumer Commission has previously found that many borrowers could achieve meaningful savings by switching home loan providers due to the impact of this so-called “loyalty tax”.
However, that does not mean you always need to leave your current lender. In some cases, asking for a better rate may be enough to improve your position.
Why a Small Interest Rate Difference Matters
A fraction of a percentage point might not sound significant, particularly when viewed as a monthly figure. Across a large home loan balance and a long remaining loan term, however, the difference can become substantial.
For example, the impact of a lower rate will depend on:
- Your outstanding loan balance
- Your current interest rate
- The remaining term of your loan
- Whether your loan is principal and interest or interest-only
- Your repayment frequency
- Any fees associated with changing loans
- Whether you make additional repayments
A more competitive rate could potentially reduce your monthly repayments, decrease the total interest paid over the life of your loan or help you repay your mortgage sooner.
Of course, interest rates can change, and the lowest advertised rate will not automatically be the right loan for your circumstances. That is why it is important to compare the complete loan, not only the headline interest rate.
You May Not Need to Refinance to Get a Better Deal
Refinancing involves replacing your current home loan with a new loan, usually through a different lender. While refinancing can provide access to a more competitive rate or more suitable features, it is not always the first or best step.
Before switching, you may be able to negotiate with your existing lender.
Moneysmart recommends asking your current lender for a better deal and letting them know you are considering a cheaper option elsewhere. A lender may be willing to reduce your rate to retain your business.
Your negotiating position may be stronger if you:
- Have built up equity in your property
- Have a good repayment history
- Have a strong credit profile
- Are paying principal and interest
- Have found a genuinely comparable offer elsewhere
If your current lender cannot provide a competitive option, it may then be worth exploring refinancing.
What Should a Home Loan Review Cover?
A home loan review should look beyond whether another lender is advertising a lower rate. It should consider how well your current loan continues to support your needs and financial goals.
A review can help you understand:
How your current rate compares
We can compare your rate with other options available for borrowers in similar circumstances.
Whether your lender can improve its offer
Sometimes a conversation with your existing bank can result in a lower rate without requiring a complete refinance.
Whether refinancing could save you money
We can compare potential interest savings against application fees, discharge costs, valuation fees and other switching expenses.
Whether your loan features are still suitable
Features such as an offset account, redraw facility, fixed-rate option or the ability to make additional repayments may be valuable but only if they suit the way you manage your money.
Whether your loan structure still meets your needs
Your circumstances may have changed since you first arranged your mortgage. Your income, expenses, property goals or family situation may now call for a different loan structure.
When Might Refinancing Not Be Worth It?
A lower advertised rate does not necessarily guarantee a better overall outcome.
Refinancing may be less beneficial if:
- The switching costs outweigh the potential savings
- You have limited equity and may need to pay lender’s mortgage insurance
- Your current loan has fixed-rate break costs
- The new loan includes higher ongoing fees
- You extend the loan term and pay more interest over time
- The new product removes features that are valuable to you
- Your personal or financial circumstances affect your borrowing options
Extending a loan back to a new 25- or 30-year term can reduce monthly repayments, but it may also increase the total interest paid. Any new loan should therefore be compared with your current loan across both its immediate and longer-term costs.
How Often Should You Review Your Home Loan?
There is no single schedule that suits every borrower, but it can be worthwhile reviewing your home loan:
- At least once every 12 months
- When your fixed rate is approaching its expiry date
- After a significant interest rate change
- When your income or employment changes
- After building substantial equity in your property
- If your repayments are placing pressure on your budget
- Before buying another property
- When your lender advertises a lower rate to new customers
A review does not mean you are required to refinance. It simply gives you the information needed to decide whether your current home loan remains competitive and appropriate.
Give Your Home Loan a 15-Minute Health Check
Remaining with the same lender may be convenient, but loyalty should not mean paying more than necessary.
A quick home loan health check can help you understand how your current rate compares, whether your lender could offer something better and whether refinancing may provide a genuine financial benefit.
Rhys can review your current home loan and talk you through the options available—with no pressure or obligation to change lenders.
Book a 15-minute chat with Rhys to find out whether your home loan is still working for you.
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
