Your lender may be quietly charging you more than they charge brand-new customers
If you have had your home loan for a few years and have never looked at refinancing, there is a good chance you are paying a home loan loyalty tax. That is the informal name for something the Australian Competition and Consumer Commission (ACCC) put a number on in its November 2020 Home Loan Price Inquiry report. It found that existing borrowers were routinely paying significantly higher interest rates than new customers at the same lender. The longer you had been with your bank, the more you were paying. This is not a small difference. Over the life of a loan, it can add up to tens of thousands of dollars.
The Numbers
The ACCC’s report gave us a clear picture of just how wide this gap has become. The longer your loan has been sitting at the same lender without a review, the more you are likely overpaying compared to someone who just walked in the door.
To put that in dollar terms: on a $500,000 loan, a 1.04% difference in rate is around $5,200 extra per year. Over five years, that is $26,000 or more that goes straight to your lender instead of into your pocket or your loan repayments.
Why the Home Loan Loyalty Tax Exists
Banks compete hard for new customers. They advertise sharp rates, run promotions, and often offer cashback deals to attract borrowers. But once you are on their books and your loan is settled, the incentive to keep your rate competitive drops significantly. You are less likely to move, and they know it.
A big part of the problem is something called discretionary discounts. These are rate reductions your lender can offer on a case-by-case basis. They are not advertised anywhere. You will not find them on a comparison site. If you do not ask, you will not get one. This makes it very hard to know whether you are getting a fair deal, because the playing field is deliberately uneven. The ACCC flagged this as a serious problem for consumers.
The other issue is that many borrowers simply do not realise how much they could save. If you have never sat down and compared your current rate to what is available in the market, the gap can be invisible. Out of sight, out of mind.
Why People Don't Switch
The ACCC looked at why so many Australians stay with their current lender even when they are being overcharged. A few common reasons came up.
These are all understandable reasons, but none of them outweigh the potential savings. A good mortgage broker can handle much of the paperwork and guide you through the process from start to finish.
What the ACCC Recommended
The ACCC did not just describe the problem. It put forward a set of recommendations aimed at making the home loan market fairer and more transparent for borrowers.
These changes would make it much easier for borrowers to understand where they stand and act on it. Whether all of these recommendations have been fully adopted is another matter, which is why it still pays to take action yourself.
What You Can Do About It
You do not have to wait for the banking industry to fix itself. There are practical steps you can take right now to stop paying the loyalty tax.
The first option is simply to call your current lender and ask for a better rate. Mention that you have been looking at what competitors are offering. Many lenders will apply a discretionary discount rather than risk losing you as a customer. It takes five minutes and costs nothing.
If your lender will not budge, or if the market has moved significantly since you took out your loan, it may be time to switch. Refinancing can deliver a lower rate, better loan features like an offset account or split loan, and potentially a lender who treats existing customers with more respect.
It is also worth reviewing whether your loan structure still suits your situation. Life changes. Your income, family size, and financial goals in 2020 may look very different from where you are today. A mortgage broker can review your current loan and compare it against what is available across dozens of lenders, all at no cost to you. You can also get a rough sense of your potential savings using a loan repayment calculator before you make any decisions.
Common questions
Q: What is the home loan loyalty tax?
The home loan loyalty tax is the informal name for the gap between the interest rates paid by long-term borrowers and the rates offered to new customers. The ACCC found in 2020 that this gap can be as high as 1.04% per year for borrowers whose loans are more than ten years old.
Q: How do I know if I am paying the loyalty tax?
Compare your current interest rate to the advertised rates on comparable home loans from your lender and other lenders. If there is a significant gap, you are likely being affected. A mortgage broker can do this comparison for you at no charge.
Q: Can I just ask my lender for a discount?
Yes, and you should. Call your lender, explain that you have been reviewing the market, and ask them to offer a better rate. Many lenders will apply a discretionary discount to retain you as a customer. If they refuse, that is a strong signal to look at refinancing.
Q: Is refinancing complicated?
It can feel that way, but a good mortgage broker handles most of the process on your behalf. The MFAA found the discharge process takes 15 to 40 days, but you do not have to manage that yourself. The savings often far outweigh the effort involved.