‘Lethargy’ leads to higher interest rates: Here’s how to avoid it

By Grace Ormsby

April 29 2020
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Average mortgage interest rates have continued to fall, but customers with new home loans do tend to be paying less interest than customers with existing loans. Why?

The same Australian Competition and Consumer Commission (ACCC) interim report that found maintaining profits was central to the decisions of banks to not always pass on RBA rate cut savings to customers in 2019 also confirmed that new loan customers are, on average, paying less to settle their debt than existing customers.

As at 30 September 2019, the average interest rate paid by new big four bank home loan customers with principal and interest repayments was 3.45 per cent.

For existing customers with principal and interest repayments, the average interest rate being paid was 3.71 per cent.

This is a difference of 0.26 of a percentage point.

Similarly, investor loans also showed discrepancy: a 0.34 of a percentage point discrepancy between average rates paid by new and existing customers on interest-only loans.

According to the report, the difference in costs persists, in part, due to price reductions for customers with existing loans not always being as large as discounts offered on new loans.

The consumer watchdog said that the big four banks are aware of the discrepancy: “Routine pricing documents considered by decision-makers showed with that, across variable rate home loan portfolios, discounts were larger for new loans; or that customers with new loans, on average, were paying lower interest rates than customers with existing loans.”

It also said “increased competition” was the reason cited by the banks as to why increasingly large discounts were necessary to attract new home loan customers.

What does this mean for mortgage customers?

Despite the consumer watchdog’s findings, maintenance of a discount difference between interest rates paid by new and existing home loan customers “does not appear to be a consideration in the big four banks’ pricing decisions”.

One big four bank explicitly went as far to indicate that it “does not seek to maintain any particular ‘gap’ between the discounts for new loans and existing loans”.

As a result, customers are strongly advised to review their home loan products on a regular basis.

“The potential benefit to home loan customers could be significant, with one bank noting that for variable rate owner-occupier customers who have not obtained a price reduction on their home loan for a ‘couple of years’, the difference between their discount and the new loan discount could ‘conceivably be at the high 30s [basis points] differential’,” the report read.

It’s an important reminder that’s been reiterated by Canstar finance expert Steve Mickenbecker.

He has considered that “it’s not a loyalty tax people are paying, but rather a lethargy tax”.

He commented that borrowers who do take action and speak to their lender are often able to negotiate a lower rate.

“But do nothing and you get nothing.”

According to Canstar, the interest rate discrepancies and differences in savings offered by the ACCC report could be even higher than reported.

Comparing average package variable rates of the major banks with their lowest variable rate loans, Mr Mickenbecker said: “Passive borrowers with the major banks that sit on their hands and do nothing about their home loan interest rate could see themselves paying an average of 0.75 [of a percentage point] more than new borrowers seeking lower rates.”

A 0.75 of a percentage point difference (package rate 3.60 per cent v lowest variable rate 2.85 per cent) can add $164 to the monthly repayment of a $400,000 loan.

This would total $59,167 over the life of the loan, according to Canstar.

“If you think you’re paying too much, it’s time to compare what your bank has to offer and what deals are available among the other 100-plus lenders,” he advised.

About the author

Grace Ormsby

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

About the author

Grace Ormsby

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

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