It is ironic that the best customers of Australia’s banks are also the most discriminated against.
While “new” borrowers are offered ultra-low interest rates, those loyal customers who have been faithfully paying back their loans for years are much more likely to be on higher interest rates.
That gap has always been there but has now become extreme as floating rate loans remain at elevated levels even as banks offer extremely low rates on fixed loans and new floating rate loans.
And it could all be about to change, with a bombshell new report recommending that banks should be required to tell borrowers every year what interest rate they were being charged and what the average rate was on new loans, while providing information to help them get a better deal.
The report from the Australian Competition and Consumer Commission found that homeowners could save an amazing $34,000 over the life of a $500,000 home loan by switching lenders.
That applies to a vast number of Australians too, with almost half of all variable rate loans being unchanged for at least four years, as the gap between the rate charged to existing and new customers continues to widen.
Loyalty tax costs up to $34,000
The ACCC found that people with older home loans are generally paying significantly higher rates than those who’ve borrowed more recently.
The ACCC now wants banks to be forced to regularly remind borrowers whose loans are more than three years old to review their rate and consider the benefits of switching products or lenders.
In a statement, ACCC chair Rod Sims said a significant number of Australians had not switched lenders for several years but could save “so much money” by doing so.
“There are factors standing in the way of home loan borrowers switching lenders, such as a lack of clear and transparent pricing, as well as inconvenience and time costs, but for many borrowers switching will be worth the effort,” he said.
Sims recommends switching
“Our recommended prompt would clearly set out for many borrowers just how much higher their interest rate is compared to new borrowers.
“This information would be a powerful motivation for borrowers to seek a lower rate from their current lender or to switch to a new lender.
“It would also encourage lenders to offer existing customers better rates, promoting greater competition in the sector.”
Government yet to agree to implement changes
While Attorney-General Christian Porter agreed the report raised some big concerns, he didn’t agree to implement the ACCC’s recommendations, with the report instead being considered by Treasurer Josh Frydenberg.
The ACCC report also pointed out that it can be very difficult to change lenders and suggested that the cost of researching rates should be cut and the current lengthy loan discharge process should be shortened to just 10 days.
The report found that in September 2020, borrowers with mortgages between three and five years old paid on average about 58 basis points more than the average rate for new loans.
Old loans can be more than 1% higher
That gap increased even further the older loans got, with loans that were older than a decade paying an amazing 104 basis points more than new borrowers on average.
The competition watchdog found that many people could save on their mortgage by asking for a better rate or switching banks.
It pointed out that a borrower with a $500,000 loan that switched to a rate 58 basis points lower than their existing loan, would save $2800 in interest in the first year and $34,000 over the remaining term of the loan.
This report is the final one in a home loan prices inquiry which the ACCC began in October 2019.
Price transparency remains a problem
An earlier interim report found that there are big problems with price transparency, with headline interest rates failing to reflect actual interest rates paid by borrowers because of the banks’ use of opaque discretionary discounts.
Some of the big banks are now reducing their reliance on handing out discretionary discounts to some customers, although the range of interest rates on the same loan products remains a big issue for borrowers.
It remains difficult for borrowers to be sure whether the interest rate they are paying is genuinely competitive or has been padded as part of what is effectively a loyalty tax.