Are you paying a Loyalty Tax?

Many Australian’s still have their home loan with major bank lenders – and it could be costing them thousands of dollars each year.

A large number of people simply let their home loan roll along because “they’re too busy to review it” or “it’s too hard to refinance”. For some they simply feel that “My home loan is where I’ve always banked”.

It’s this attitude that is costing people thousands of dollars each year on their home loan, because in fact their bank loyalty means they are paying too much in interest.

Very recently the Australian Competition & Consumer Commission (ACCC) released its interim Home Loan Pricing Inquiry report, which examines how the big four banks priced their mortgages between 1 January 2019 and 31 October 2019.

In its interim report the competition watchdog found that recovering profit is “central” to the major banks’ decisions not to always pass on the full RBA rate cut. In effect existing bank customers are penalised for their loyalty.

The interim report considers interest rates paid by home loan customers and how major banks decide what to charge on variable rates, as well as overall trends in home loan pricing, the influence of the cost of funds on home loan interest rates, and how easy/difficult it is for borrowers to understand their rates and fees compared to market.

The ACCC also focused in on how the banks treated the RBA’s rate cuts in June, July and October 2019.

Building on the findings from the ACCC’s Residential Mortgage Price Inquiry, the key finding of this report was that “maintaining profits was a major consideration for the big four banks as they weighed whether to reduce mortgage rates in line with Reserve Bank of Australia cash rate cuts during 2019”.

Profit was “central” to their decisions to not always fully pass through the lower rates to mortgage customers, the ACCC argues.

Speaking of the findings, ACCC Chair Rod Sims said: “The banks were attempting to shore up their profitability during a period of low interest rates.”

Find out how a home loan refinance works

Comparison confusion

The ACCC’s Home Loan Price Inquiry interim report also shows that although average interest rates charged by the big four banks on home loans fell during 2019, a lack of price transparency and higher interest rates for existing loans continued to cost customers.

The ACCC also found that home loan pricing practices continue to make it difficult for consumers to compare different mortgage products.

“Given the economic disruption, uncertainty and job losses stemming from the COVID-19 pandemic, many consumers may not be inclined to shop around right now,” Mr Sims said.

“However, our analysis shows how that even a small further reduction in interest rates could potentially save thousands of dollars over the life of a mortgage.”

So what can you do?

The first step is very simple. A brief phone or web chat with a lending specialist can help you understand your options and how a refinance may work for you. In the initial discussion they may also be able to give you a rough indication of what savings could be on offer.

A professional lending specialist will do the comparison work and present options for you to consider. Their report can also detail potential savings. After that they will work with you on getting the paperwork together, and deal with the lender credit team on your behalf.

To maintain safe social distancing a lending specialist can work with you remotely over phone or web chat, and in some cases even your loan documents can be signed digitally.

So you could be enjoying savings in no time – thinking about how you wisely save, spend, or invest the extra dollars in your pocket each month!

This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice.