Loyal to a fault
It may be an admirable trait in personal relationships, but in financial matters, loyalty can come at a cost.
Sticking with the same loan longer than three years can cost borrowers thousands, with competition to win business resulting in new customers paying lower rates than existing ones.
This so-called loyalty tax has become such a hot topic, the Australian Competition and Consumer Commission has recommended mortgage holders review their options regularly and consider switching to secure better terms. Now is a great time to follow that advice and get in touch.
Rush to reset
Homeowner refinancing has hit an all-time record in the past six months, and it’s easy to see why, with interest rates at long-term lows. But it’s not just fixed rates borrowers should have their eye on. Homeowners with variable rates need to check they aren’t unwittingly paying a loyalty tax too.
Reserve Bank figures show owner-occupiers who took out new variable loans in October 2021 paid, on average, 2.63 per cent interest, while those with existing variable loans paid rates around 0.37 per cent higher rates at 3 per cent.1 On a loan around $350,000, that’s potentially adding an extra $1,295 in interest each year.
As a customer there’s few things more galling than finding out someone who came to the party late has been given a bigger slice of cake than you. That’s why the most empowering thing you can do is to simply shop around, which is what I can do for you.
Annual review
Being financially savvy is about developing good habits, and one of the best for homeowners is to book an annual appointment to review your home loan arrangements.
The start of a new year is the perfect time to dive in. People usually have a little more headspace before the year really ramps up and finding savings can be a great cure for that summer spending hangover.
Speak to me to check how current variable rates compare, or perhaps it’s a good time to consider locking in a deal. Fixed rates have increased recently and speculation is mounting about a possible official interest rate rise in late 2022 or early in 2023.
More than interest only
Of course, refinancing isn’t always about interest rates alone, although they are a big part of the equation. It may be about building more flexibility into your loan with offset and redraw facilities, the ability to make additional repayments, or unlock equity for a renovation, a major purchase or holiday.
Some borrowers may even want to consider options such as splitting a home loan between both fixed and variable options.
It’s all about what your goals and priorities are right now, and we all know that can change unexpectedly year on year.
Broker insight
The home loan market has never been more competitive and we’re adding more lenders to our panel each year, with more loan products and features. It can be daunting, but it’s also where I can offer you an advantage in guiding you through what’s out there to meet your needs.
I can also help calculate how any potential savings stack up in the short and long term against any search and switch costs. It’s important to stay on top of rates and offerings in a fast-moving market. So, get in touch to arrange a quick check-up for your home loan.
1 Lenders’ Interest Rates, Reserve Bank of Australia (published monthly online: rba.gov.au/statistics/interest-rates/#lenders-rates-table)
Add it up
In December 2020, the Australian Competition and Consumer Commission released the final report of its Home Loan Price Inquiry, concluding people with older home loans were potentially paying thousands more in interest than new customers. And it’s not just about falling interest rates. Newer customers are often able to secure variable loans at lower rates than existing customers because of competition to secure business, the report found.
And the older the loan, the worse the disparity. In September 2020 (when the report was compiled), owner-occupiers signing new variable-rate loans were paying an average interest rate of 2.62 per cent, meanwhile:
- Owner-occupiers with 3-5 year-old variable rate loans paid an average rate of 3.20 per cent.
- Owner-occupiers with variable loans 5-10 years old were paying 3.33 per cent.
- Owner-occupiers with a variable loan greater than 10 years old were on 3.66 per cent.
On an average loan balance of $350,000, those with older loans could save up to $3,640 a year in interest payments by switching. (See table below).
Little wonder one of the major recommendations of the inquiry was for lenders to send annual prompts to customers with loans older than three years to encourage them to review and consider refinancing. While lenders, perhaps understandably, haven’t run with the advice to encourage their clients to switch or push for a lower rate, I’m happy to help you regularly compare your deal to the current market.
| Age of variable home loan at Sept 2020 | New | 3-5 yrs | 5-10 yrs | >10 yrs |
| Average interest rate at Sept 2020 | 2.62% | 3.20% | 3.33% | 3.66% |
| Additional annual intrest paid on $350,000 loan | $2,030 | $2,485 | $3,640 |
Source: ACCC Final Report: Home Loan Price Inquiry, December 2020
Source: Home loan price inquiry – final report, The Australian Competition and Consumer Commission, 5 December 2020. (accc.gov.au/publications/home-loan-price-inquiry-final-report)
Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. Information in this article is correct as of the date of publication and is subject to change.