The Australian Home Loan Loyalty Tax: Why Refinancing Can Save $37,462: RBA and ACCC

When talking about the Australian “loyalty tax” when it comes to home loan policy, it refers to the extra cost homeowners incur with older mortgage policies, when compared to newer Australian borrowers. This loyalty tax occurs both in cases of Australia’s Big 4 Institutional Banks, and smaller size lending agencies. This loyalty tax has been observed in the Reserve Bank of Australia statistical release in June 2021 that evaluated the longer-term mortgage cost of not refinancing an existing home policy. For Australian owner-occupiers, there is an average cost of $37,462 in interest payments from “old” home loans to “new” home loans, holding other factors fixed. To explain the entire picture of the “loyalty tax,” we will:

1. Run through what the loyalty tax is in full detail.
2. What is holding back Australian homeowners when it comes to switching policies.
3. What is the full accounted cost of the “loyalty tax.”
4. How Limitless Loans Can Help.

The Australian Loyalty Tax: What is it?

Generally, it’s an observed difference between both newer signed mortgage loans and “outstanding” (or older) home loans policies. The “loyalty tax” first seems counterintuitive at first, as financial institutions both large and small would see consistent mortgage payments as lower-risk customers, and be incentivized to keep customers away from refinancing. This competition is especially fierce in 2021, where  the 0.10% cash rate set by the Reserve Bank of Australia since November 2020 has made access to loan capital cheaper. Due to the cognitive bias and information asymmetry of customers, there has been a persistent gap between outstanding loans and new home loan borrowers.

A lack of expectations from banks is certainly not driving the response behind the “loyalty tax”. Australian mortgage holders in 2021 do expect their current home loan to match with their current holding. From a survey of 1000 Australian mortgage holders, conducted by CoreData Research on behalf of Athena Home Loans, there was an expectation that 91% of borrowers want new and existing customers to receive the same rate. So, customers are already primed against the difference in outcomes occurring with the loyalty tax. As of September 2021 Reserve Bank of Australia cash rate of 0.10%, capital is easier to access for financial institutions. This position is shared by Athena CEO and Co-Founder Nathan Walsh, who comments that “Rates are at an all-time low at the moment, so it’s at a crucial time when Australians need the money in their pockets, not the banks,”

What is holding back Australian homeowners with the loyalty tax?

What actually Australian homeowners back when it comes to switching Interest Rate policies? Well, a starter is a lack of transparent financial policies offered by Australia’s Big 4 Financial Banks and smaller home loan offerers. From “opaque” interest charging and poor refinancing policies offered, consumers have felt highly dissatisfied with the current regime. CoreData’s consumer sentiment survey has found that 56% feel currently trapped in a current mortgage deal, and a further 36% of home loan owners surveyed asked and were rejected from a drop of their current interest rate. CoreData’s current CEO Andrew Inwood, after reviewing the consumer sentiment survey, commented that “We know transparency is at the heart of trust. There is an enormous opportunity for those lenders with clear pricing and a simple value proposition.” So, part of the issue with Australian home loan owners facing the loyalty tax is an “asymmetry of information” with their policy providers.

A start to understanding what actually holding back is what policymakers, such as the Australian Competition and Consumer Commission’s (ACCC) and the RBA, think about the current loyalty tax.

The RBA, as part of its Statement of Monetary Policy in February 2020, has a section directly addressing the question of “Do Borrowers with Older Mortgages Pay Higher Interest Rates?” It found that published standard variable rates (SVRs) don’t necessarily reflect the amount actually paid for by consumers. The average discount offered by Australian banks amounts to 100 basis points lower than the standard variable rate. The RBA comments that “​​Well-informed borrowers have been able to negotiate a larger discount with their existing lender, without the need to refinance their loan.” So, the Reserve Bank of Australia observes that the loyalty tax comes from home loan seekers having a lack of information about their home loan policies.

The ACCC has published a final report in December 2020 as part of its Home Loan Price Inquiry. The purpose was to  investigate the market structure and practices of the home loans pricing industry. What is identified specifically was oligopolistic behaviour (80% of home loans are from the Big 4 Australian banks), a difference between the prices paid on new and existing home loans, and that price gap disproportionately affecting borrowers who don’t switch policies. They make 4 recommendations to update the regulatory regime, which are:

1.  A prompt for variable-rate borrowers: All lenders should be required to provide borrowers with variable-rate loans originated three or more years ago.
2.  A standardized Discharge Authority form: All lenders should be required to provide a standardized Discharge Authority form to borrowers to complete.
3. A maximum time frame for existing lenders to process discharge requests: All lenders should be subject to a maximum time limit of 10 business days to complete the discharge process.
4. Continued monitoring of competition and prices in the home loan market: The ACCC should continue to inquire into and monitor competition and pricing in the home loan market, under government direction.

While these recommendations are a great start, there is uncertainty as to whether these translate into concrete legislation. The ACCC regulatory recommendations can give an idea to the broader market failures of the mortgage lending market that may impact all of your ability the

The cost of the loyalty tax to Australian mortgage holders?

For Australian homeowners, there is a 0.46% difference in standard variable rates between new and outstanding home loans. That, on the surface, may not sound as shocking, but it can certainly accumulate. On an average Australian loan size of about $400,000, that 0.46% difference on a 30-year loan means a borrower would pay an additional $37,462 in interest over the life of the loan. Additional modeling from Athena Home Loans research estimates this costs Australian households a total of $9.1 billion per year. So, the loyalty tax has substantial ripple effects on both your own financial health and wider Australian homeowners.

What can we do?

Here at Limitless Loans, we have experienced mortgage brokers who know how to bridge the information gap that Australian borrowers face. We can make sure that, whether it’s an Australian Big 4 Bank or a smaller mortgage lender, we’ll help minimize your interest paid on your loan, including attacking the mentioned loyalty tax. The next best step is to book a free consultation to discuss your current situation.

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