The Australian Competition and Consumer Commission (ACCC) last week published its inquiry into mortgage pricing, including what critics call the “loyalty tax”, whereby new customers pay lower interest rates than existing borrowers.
The watchdog admitted that with job losses rising because of COVID-19, many may be wary about shopping for a new loan. Even so, a key finding of the inquiry is that loyalty to your bank does not pay.
Why not? Because banks reserve their best rates for people who are new clients, or those who pester for a better deal.
The ACCC says that in the year to September, customers who took out new home loans were on average paying interest rates that were 26 basis points less than customers with existing loans. That’s equal to $57 a month less in payments on a $400,000 loan.
And the longer you are loyal to a bank, the more uncompetitive your interest rate is likely to be.
For example, the ACCC said customers with a five-year-old loan were typically paying 40 basis points more than people taking out new loans.
So, why do banks charge in this way? And what can you do to make sure you don’t get dudded?
Commercial forces drive banks to give new customers sharper rates, because they want to sell more loans, but preserve profit margins. One way to do this is by offering better rates to people looking for a new loan, while charging others a bit more.
How do they offer one customer a significantly better deal than someone who has been on the books for years? Through discounts off the standard variable rate (SVR).
The ACCC said these discounts were typically 123 to 131 basis points off the SVR. For 13 per cent of big-four bank customers, these discounts are 150 basis points or more off the SVR.
Discounts have been creeping up in recent years, and the effect of this is that a good deal of a few years ago is now uncompetitive.
So, the ACCC suggests customers regularly review their loan, or for an even lower rate, consider moving to another bank or switching to another product from their current lender.
The problem with this process is that it’s tedious. It’s also not transparent, because it can be difficult to know how your discount compares with others.
Over the long term, the ACCC is hopeful that a data-sharing regime known as “open banking”, aimed at encouraging consumers to share their banking information, can reduce the hassle of comparing home loans and switching banks.
Until then, however, the best way to avoid the loyalty tax is to make an effort to be disloyal.
Clancy Yeates is a business reporter.