Homeowners unnecessarily pay $5k extra in interest on a three-year loan

Sitting back and watching the interest rate rise on your home loan can unnecessarily cost you hundreds of dollars more per month.

Homeowners are warned not to fall victim to a “mortgage loyalty tax” by sticking with their current lender, as banks offer discounts and perks to compete for new customers.

Analysis by RateCity shows that all four major banks offer new customers a significantly lower variable rate than existing customers who haven’t “haggled” for something better.

The financial comparison site found that someone who took out a variable-rate loan in September 2019 could pay an interest rate nearly a full percentage point higher than a new customer today.

Looking at Australia’s largest bank as an example, RateCity estimates that a Commonwealth Bank customer who took out a $500,000 loan three years ago would have paid an additional $5,101 in interest at the time if they hadn’t negotiated.

For a $750,000 loan, it’s an additional $7,652 in interest, and for a $1 million loan, it’s $10,202.

RateCity explained that in those three years, the bank offered discounts on the lowest variable rates to new customers five times, meaning that unless an existing customer called their bank and negotiated each time, they were missing out on 0.93 percentage point of their rate.

Commenting on RateCity’s findings, Commonwealth Bank said in a statement that it is committed to providing existing and new customers with “a range of low-cost and flexible home loan products”.

It highlighted its “Green Home offering,” where existing customers can access a low standard variable rate if their home meets certain sustainability and energy-efficient criteria.

“We encourage our clients to contact us to see how our extensive network of mortgage specialists can help them find the right solution for their needs,” said a spokeswoman for CBA.

The Reserve Bank of Australia raised its official cash interest rate by 0.50 percent on Tuesday, the fourth increase in four months.

While the major banks have fully passed on the rate increases to existing customers, they are still offering discounts to bring in new customers.

Sally Tindall, Research Director of RateCity, said banks “fell over themselves” to offer discounts and benefits to borrowers willing to switch from a competitor.

“Once the August rate hikes kick in, a competitive owner-occupier rate is likely to be around 3.50 percent,” she said.

“If your variable rate starts with a 4 or even a 5, you really have to wonder why.”

RateCity found that at least 10 lenders have cut variable rates since the increases began, but only for new customers.

According to the Australian Bureau of Statistics, the value of refinanced loans rose $1.06 billion in June to $18.16 billion. That’s the highest value ever.

In addition to rate hikes prompting mortgage customers to shop around, Ms Tindall said many borrowers would get rid of low-fixed-rate contracts they signed up for during Covid.

“Refinancing hit an all-time high in June and we expect it to continue to climb as borrowers scale down their fixed loans, only to find that rates have gone through the roof since they last looked at their mortgage,” she said.

“This, in turn, will encourage banks to come up with even more discounts and benefits for new customers, especially refinancers looking to switch from a competitor.”

Customers also have the option to call their bank and negotiate a better interest rate.

“If you’re down this path, do your research before calling,” Ms Tindall warned.

“Check what rate you have, see what rate your bank offers to new customers, but also what other lenders may be willing to offer you.

“If you have a few quotes ready for some of your bank’s competitors, they’ll probably notice.”

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