Is your lender charging you loyalty tax?

Find out what a loyalty tax is, how to avoid paying it and how you can save on your mortgage

By Amy Focic|02 August 2022|4 minute read

father and son using a laptop and discussing home loans

If you have a home loan, chances are it’s your biggest recurring expense. So, it makes sense to try and save money on your mortgage where you can.

You might be paying more on your home loan because of loyalty tax. Here we’ll explain what loyalty tax is and how you can avoid it, plus other ways to save on your mortgage.

What is loyalty tax?

Loyalty tax isn’t a true tax – it refers to the extra money you may pay when you’re loyal (to a fault) to your home loan lender.

This can occur when lenders charge existing customers a higher interest rate than new customers.

Lenders do this because they assume once you settle on your home loan, you won’t continually check to make sure you’re still on a competitive rate.

Lenders also assume refinancing is too much of a hassle for borrowers who suspect there might be a better deal out there.

Doing a quick comparison of your interest rate and the rate offered to new customers with your lender could tell you if you’re paying a loyalty tax.

Your local Aussie Broker can do the leg work for you and see if your lender is charging a loyalty tax on your loan.

How much could I save by switching to a lower interest rate?

If you’ve found out you’re paying a loyalty tax on your home loan, you may want to work out how much money you could save by changing to a lower rate.

Even an interest rate reduction of 0.5% could save you hundreds each month. Check out the table below to get an idea of how much you could save.

Loan size Interest rate Monthly repayment
$400,000 4% $1,910
$400,000 3.5% $1,796
$600,000 4% $2,864
$600,000 3.5% $2,694
$800,000 4% $3,819
$800,000 3.5% $3,592

*Based on an owner-occupier P&I loan with a loan term of 30 years.

How can I avoid paying loyalty tax?

Switching to a lower interest rate doesn’t have to be a difficult process. There are a few things you can do to take action on your home loan.

Speak with your lender about lowering your rate

Your first port of call when seeking a lower interest rate is to negotiate with your lender.

This usually looks like calling up your lender (or visiting in person) and requesting a reduced rate. It could help to have a comparison ready of your interest rate and the rate offered to new borrowers.

This way, you can ask to have your lender match this interest rate. An Aussie Broker can also do this on your behalf.

It may also help to have a reliable repayment history and a good credit score. Demonstrating that you’re an exemplary borrower could sway your lender to lower your interest rate. 

It’s important to note that the rate you might be able to negotiate with your lender may not be their lowest possible rate, or the lowest rate on the market.

If this is the case, it might be worth refinancing your home loan with another lender.

Refinance with another lender

It’s a good idea to do plenty of research before you make the decision to switch lenders.

The different lenders and loan products on the market can be overwhelming. If you need a hand narrowing down your search, an Aussie Broker can do the hard yards for you to find a loan that suits your needs.

It’s also important to look at all parts of a home loan before you refinance. While the loan may have a lower interest rate, it might have higher fees or less features than your current mortgage. 

You can also expect to pay some fees when refinancing

What else can I do to save on my home loan?

Have you already taken action to get a lower interest rate on your home loan? Here are some other steps you can take to save money on your mortgage.

1. Use an offset account

Putting money into an offset account can help you reduce the interest you pay on your home loan.

An offset account is a type of bank account where the funds in the account offset the interest charged on your home loan.

So, if you have a remaining home loan balance of $431,000 and $25,000 in an offset account, you’ll only be charged interest on $406,000 instead of $431,0000. 

2. Get rid of features you pay for but don’t use

Maybe you have an offset account that you don’t use, but you pay for in annual fees. Or, maybe you got a credit card with your home loan package that hasn’t left your wallet – but you’re paying for it anyway.

Whatever your situation, you could save money on your home loan by removing features that you are charged for, but don’t use.

3. Make extra repayments when you can

If you can, making extra repayments on your home loan now could save you thousands in the long run.

Making additional repayments on top of your monthly repayments can help you pay off your home loan faster, saving you money in interest charges.

Unlimited extra repayments are typically only available on variable rate home loansfixed rate home loans usually have caps on how many extra repayments you can make.

You may also have access to a redraw facility if you have a variable rate mortgage. A redraw facility pools any extra repayments you make, so you can withdraw them down the track if you need to.

Do you need a hand comparing home loans? An Aussie Broker can do the hard work for you to find a home loan that suits your needs. Book an appointment at a time that suits you.

Book a chat with an Aussie Broker

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