In early 2020, Reserve Bank of Australia (RBA) governor Philip Lowe warned loyal bank and mortgage customers to shop around instead of sticking to their old business. There is such a thing as loyalty tax that takes an extra $ 1,000 per year in interest payments.
So, what exactly is loyalty tax? Is there any way to avoid paying for this? If you want to know the answers, this blog post is for you. Here’s everything you need to know about loyalty tax.
What is Loyalty Tax?
First, although the word “tax” is in it, loyalty tax has nothing to do with the Australian Taxation Office (ATO). We have always believed that a long-term customer has many benefits, including getting better deals. But in reality there is the loyalty tax, which is the tax you pay to a bank, insurance company or service provider because you are a loyal customer.
It certainly doesn’t sound appealing at all. In a perfect world, we should get enticing offers, so we’ll stick with the same company and keep using their products. Unfortunately, this is not the case with mortgages and banking. Instead, long-term customers have to pay a higher fee, while new customers receive discounts.
In 2019, the RBA cut the official cash rate by 0.25 percent for the third time in just a few months. But the four major banks have not passed on the full rate cut to their customers – also for the third time.
Treasurer Josh Frydenberg discussed the specific issue with the Australian Competition and Consumer Commission (ACCC). And, among other things, the ACCC has raised concerns about the loyalty tax.
Frydenberg believes that banks benefit from customers who choose to remain loyal to one company. Rather than being grateful, the banks and other financial institutions are giving higher interest rates to loyal customers. One reason is the certainty that comes from the knowledge that the customers will not switch to another bank, especially because they do not have the time or are inclined. One reason is the certainty that comes from the knowledge that the customers will not switch to another bank, especially because they do not have the time or are inclined.
What about smaller lenders?
Loyalty tax doesn’t just exist among the big four. Even small and medium-sized financial organizations charge a loyalty tax to their existing customers, while offering lower rates to new ones. Before the mentioned RBA cut in 2019 above, lenders charged 63 basis points against the average loyalty tax. Meanwhile, the big four charged just 47 basis points.
A year earlier, the non-big four banks would add an average of 60 basis points to their loyalty tax, while the big four charged 48 basis points. These numbers show that small and medium-sized lenders were steadily increasing the loyalty tax they impose on existing customers. It is a strategy that makes it possible to maintain returns while attracting new customers, which is crucial in a competitive financial landscape.
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Nonetheless, Treasury figures showed that the big four are still earning more despite higher rates from other lenders. Unsurprisingly, given that they have a market share of around 75% when it comes to home loan customers. Because they don’t fully endure the rate cut, this delaying tactic brings them nearly $ 570 million in revenue.
How much do you pay for your loyalty tax?
RBA Governor Philip Lower said the RBA, along with the Australian Prudential Regulation Authority (APRA), found that customers with an owner loan pay an average of 3.64% when they work at the bank for at least four years. Meanwhile, new customers pay an average of 3.23%.
If you have a $ 400,000 home loan, the 0.41% difference will add $ 1,634 to your first year interest. Note that this sample rate is based on the difference between the rates for existing and new customers, taking into account the principal and interest payments for a term of 30 years.
What should you do?
Price discrimination is not uncommon. Nor is it illegal, not just in the financial world, but almost everywhere else. For example, there is an unspoken familiarity that you could be sitting next to someone on an airplane who paid a much lower price than you.
Banks and other industries are taking advantage of clients, especially their slowness. It’s up to the people to do something about it. So what should you do?
If it has been a while since you took out your home loan, one of the first things you may want to do is negotiate with your current lender. Don’t worry if the negotiation doesn’t lead to a positive result ltaat has led. It’s worth a try before looking around which brings us to your other option.
If your current bank says there are no better deals for you, look elsewhere. As a new customer, borrowers can enjoy incredibly competitive rates. What you need to do is understand your options and make sure you’re taking advantage of the current terms. Never settle for the packages that are regularly offered to customers. This basic loan often has features that you don’t even need, such as credit cards and contra accounts (unless you know it will benefit you).
Customer apathy is often cited as the reason why existing borrowers are not getting an attractive rate. However, it is mainly due to the lack of transparency between banks when it comes to their prices and processes. Ultimately, customers don’t take action because they don’t know the available and better offers.
Without a doubt, loyalty is an admirable quality. However, when it comes to your mortgage loan, you don’t need to own it. If you want to get the most out of your money, shop around and look for better deals. Despite being happy with the performance of your current lender, you don’t want to pass up the opportunity to pay less.
So if you’ve been with your bank for three or more years, it’s probably time to make the switch. Take the time and effort to research to find a lower rate from other lenders.
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