Are you being stung by the loyalty tax?

Are you being stung by the loyalty tax? February 13, 2020

Once upon a time you were rewarded for loyalty. But borrowers with older mortgages are typically paying a higher interest rate than customers on new loans, confirms the Reserve Bank of Australia (RBA).

The RBA’s study finds that the difference in interest rates between new and outstanding variable-rate home loans increases with the age of the loan.

For example, for loans written four years ago, borrowers are charged an average of 40 basis points higher interest than new loans.

“For a loan balance of $250,000, this difference implies an extra $1,000 of interest payments per year,” explains the RBA.

And for loans more than eight-years-old, on average, you pay about 60 basis points more than a new customer.

What’s driving the difference?

The RBA says the difference in rates between older and newer mortgages can be partially explained by a shift in the mix of different types of variable-rate mortgages over time.

“In particular, the share of interest-only and investor loans in new lending has declined noticeably in recent years and these tend to have higher interest rates than other loans,” the RBA says.

“Nevertheless, even within given types of mortgages, older mortgages still tend to have higher interest rates than new mortgages.”

Strong competition for new borrowers

Here’s the real kicker, though. With competition for borrowers intensifying over recent years, banks are offering large discounts on their standard variable rates (SVRs).

What’s an SVR? It’s the reference rate that a bank prices its variable-rate loans against.

Basically, it’s the interest rate that banks and media quote when they report whether or not a rate cut is being passed through to customers.

But, as the RBA points out, very few borrowers actually pay interest rates as high as the SVR.

Instead, most borrowers are on advertised rates that are “materially lower” than a lender’s SVR, or have negotiated a further discount – and those discounts are getting bigger and bigger each year.

Time to renegotiate?

The discounts borrowers receive on loans are usually fixed over the life of the loan. However, the good news is that in some cases they can be renegotiated and this is where the team at Vault Plus Mortgages can assist.

“Well-informed borrowers” don’t accept what is handed down to them from their bank and more are getting a Mortgage Broker ‘on the case’ to review their options from a wide variety of lenders.

So, if you’d like to put yourself into the RBA’s “well-informed borrower” category, then get in touch with the team here at Vault Plus Mortgages today.

We’d be more than happy to discuss your options and your plans going forward..


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