Homeowners are leaving money on the table thanks to mortgage ‘loyalty tax’: Finspo


Australian homeowners are continuing to pay a high price for their loyalty, with the latest figures from the Reserve Bank revealing that interest rates on existing home loans are currently 39 basis points higher, on average, than they are on new loans. 

This interest rate gap exemplifies what’s commonly referred to as the home loan ‘loyalty tax’ - a tax which is costing many borrowers thousands of dollars each year.  

“It may sound like a small amount but when you consider that the average Australian mortgage currently stands at $574,000, that equates to a difference of $2,238 per annum that existing homeowners are leaving on the table,” says Angus Gilfillan, chief executive of fintech and digital mortgage broker Finspo.

“Australian homeowners are literally losing thousands of dollars that could be used to pay off their home loans faster, or to pay other bills that keep the household running, purely because of their loyalty to their existing lender."

Finspo’s analysis of the mortgage loyalty tax comes on the eve of the 1-year anniversary of the Australian Competition and Consumer Commission’s (ACCC) Home Loan Price Inquiry Report, which was released in December 2020.

In the report, the ACCC called attention to the fact that homeowners with older mortgages were often paying significantly higher rates than those with newer loans.

The regulator also made a number of recommendations including that lenders should be required to prompt borrowers with older loans to review their rates, and that the mortgage discharge process should be made simpler and faster.

As Gilfillan says though, there’s been little change in the interest rate premium between new and existing loans since Treasurer Josh Frydenberg first tasked the ACCC with conducting a home loan price inquiry back in 2019.

“Since the ACCC’s Home loan price inquiry was commissioned, the gap between new and existing interest rates has actually become worse, not better. In October 2019, it stood at 0.38% per annum, compared with the 0.39% we have now, and even soared to 0.52% per annum in December 2020.”

So what can existing mortgage holders do to make sure they’re not getting stung? One option which plenty of homeowners seem to be taking is to refinance their loan.

The most recent lending indicators from the Australian Bureau of Statistics (ABS) show that borrowers refinanced over $16 billion worth of home loans in September alone - one of the highest amounts recorded.

This race to refinance is perhaps unsurprising given the sharp fall in home loan rates in recent years. For instance, since November 2019 the average variable rate for owner occupiers (80% LVR) in the Mozo database has dropped from from 3.74% to 3.12%.

And as a result, many mortgage holders seem to be taking the opportunity to grab a lower rate on their loan by switching lenders. 

“With interest rates at record low levels, now is absolutely the time for Australians to look for a better rate on their home loans,” says Gilfillan.

RELATED: Rate rise could hurt more than half of Aussie home loan customers

Curious about refinancing? Check out our range of refinancing guides for more tips and tricks to switching loans, or learn more about Finspo and the Finspo app by reading through our linked article

Refinance home loan comparison - last updated 13 August 2022

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    3.14% p.a. variable
    3.06% p.a.

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    Owner Occupier, Principal & Interest, LVR<80%

    interest rate
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    Initial monthly repayment
    3.29% p.a. variable
    3.33% p.a.

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    <60% LVR, Owner Occupier, Principal & Interest

    interest rate
    comparison rate
    Initial monthly repayment
    3.79% p.a. variable
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* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.

** Initial monthly repayment figures are estimates only, based on the advertised rate, loan amount and term entered. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.

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