Mortgage refinancing surges as borrowers slugged ‘loyalty tax’ for sticking with their banks

Major banks are pricing home loans for new customers markedly lower than for existing ones, creating a so-called loyalty tax.

Mortgage borrowers stand to lose many thousands of dollars in interest by sticking with their current bank.

Being a loyal mortgage customer can see you forking out an extra $5101 in interest to your bank over three years, although some borrowers are smartening up which is driving a switching boom.

Mortgage interest costs are again in focus after the Reserve Bank hiked official rates for the fourth straight month. The latest 50 basis point increase takes the cash rate to 1.85 per cent, adding a further $140 to the monthly interest bill on a $500,000 mortgage once passed on to borrowers.

The major banks – and Macquarie – were quick to pass on the latest hike in full to mortgage customers, with changes to deposit rates being more of a mixed bag.

As the market slows and demand for loans also wanes, the large banks are fighting harder to win new customers with attractive rates, leaving existing borrowers wearing the pain of higher rates.

Analysis by RateCity shows the major banks all price home loans for new customers at markedly lower levels than what loyal customers are paying, creating a so-called loyalty tax issue.

Westpac has the biggest gap because it is offering a two-year honeymoon home loan rate to new customers which is 1.09 percentage points below what existing borrowers are paying. That differential narrows to 0.69 percentage points after the two-year period ends.

Commonwealth Bank – which has lowered rates for new customers seven times over three years – is not far behind with a rate gap of 0.93 percentage points between existing and new borrowers.

RateCity calculates that a customer who took out a $500,000, 30-year mortgage in September 2019 on CBA’s lowest variable rate and “hasn’t haggled”, would have stumped up an extra $5,101 in interest over the last three years.

Responding to questions on the disparity, a CBA spokeswoman said the bank was committed to providing existing and new customers “with an array of great value and flexible home loan products”. She highlighted CBA’s green home loan as an example that provided new and existing customers access to a low rate if their house met sustainability and energy efficiency criteria.

But some mortgage customers are already voting with their feet as competitive dynamics play out.

The latest Australian Bureau of Statistics data shows refinancing surged to almost $18.2bn in June, a new monthly record. That eclipsed an earlier peak of $17.2bn in August 2021, when many were locked down due to Covid-19 outbreaks and borrowers were rushing to take advantage of low rates.

The refinancing trend will also be underpinned by $500bn in mortgages coming off fixed rates.

“We’re expecting home-loan refinance numbers to remain high over the medium term,” said Elula co-founder Josh Shipman. ”This will be amplified with a high volume of fixed-rate loans expiring and customers rolling onto much higher interest rates.”

Elula uses technology and artificial intelligence to help predict when loan customers are at risk of leaving, giving it a broad view of the mortgage sector. The firm counts more than 20 lenders as customers.

“Interestingly, refinance rates across the banks are not consistent. Whilst there is absolutely elevated levels of refinance in the market, not everyone is losing,” Mr Shipman said. “Some of the refinance numbers at lenders are sitting comfortably under the 5 per cent mark with others peaking well over 20 per cent.”

RateCity research director Sally Tindall said rising variable rates would “push more people toward refinancing” to help soften the blow of further hikes.

“A continued surge in refinancing will push the banks to come up with more discounts and perks for new customers,” she added. “In this environment it is critical people keep track of what their rate is doing but also what banks are offering new customers for the exact same loan.”

The RateCity analysis used the lowest mortgage rates offered by the major banks, not rates provided in their home loan packages. Banks – which earn more income from loans as mortgage rates rise at a faster clip than deposit rates – are taking advantage of the current climate.

Financial comparison group Mozo called out banks passing through rate hikes more quickly to customers as a theme this month after the RBA’s move.

Mozo’s analysis showed the average time for a rate increase to become effective – by lenders that have announced changes – had shortened to eight days after the RBA’s hike. That compares to a 14-day average period after the July rate rise and 16 days after May’s move. The RBA is closely monitoring how rate rises filter through the economy.

Its quarterly Statement on Monetary Policy on Friday highlighted that declining house prices would have a “wealth effect” and dampen the appetite for consumers to spend. The RBA’s assessment also said about a quarter of home loans in the market were fixed-rate mortgages, taken out at an average 2.4 per cent. It noted the proportion of fixed loans had declined as funding costs increased and banks reflected that in pricing. “The share of new lending at fixed rates has declined and is now well below early 2020-levels,” the RBA said.

Macquarie Capital’s analysts said rate hikes may result in borrower stress if repayments climbed by more than 40 per cent and official rates got to 3 per cent.

“Key areas of concern in mortgages would be areas that experienced rapid price growth and typically have volatile prices, including properties far from CBDs,” they outlined in a note to clients. “As arrears rise, we expect increased provisions to occur even if losses remain modest.”

Stockbroking firm CLSA conducted a survey of almost 2100 Australians in late June and noted respondents had increasing financial concerns.

“The results from the eighth edition of our series, dating back to 2011 … reveal some signs of concern and distress – but also surprising levels of stability and strength,” the analysis said. “Collectively, Mr & Mrs Australia are feeling less financially comfortable in 2022 than at any other time over the past decade; in stark contrast to the last two years.”

Originally published as Mortgage refinancing surges as borrowers slugged ‘loyalty tax’ for sticking with their banks