‘Loyalty tax’ costs borrowers $9bn, finds neo-lender

A new study commissioned by fintech lender Athena Home Loans has found that borrowers are feeling frustrated and annoyed that new borrowers can typically access lower rates than they can.

According to the survey of 1,000 home owners, undertaken by CoreData in June 2021, 81 per cent of Australian home owners believe that their lender gives new customers better deals, with 82 per cent stating that they felt penalised for their loyalty.

Moreover, nearly eight out of 10 respondents (78 per cent) said they felt as though their lender was taking advantage of them, while just under three-quarters (74 per cent) of borrowers said they were angry with the practice. A similar proportion also stated they were “outraged” and “fed-up”.

Transparency was also a key theme, with the vast majority (91 per cent) of borrowers saying that they would like their lender to disclose the rates that they give to new versus existing customers. 

Three-quarters of borrowers surveyed said that the practice of offering new customers lower rates should be stopped altogether.

The cost of ‘loyalty tax’ could total $9bn

The issue has been of increasing focus recently, with the Reserve Bank of Australia (RBA), having previously highlighted the issue.

It found in May of this year that variable rates on owner-occupier loans have decreased by 47 basis points between February 2020 and March 2021.

By comparing existing and new owner-occupier interest rates on an aggregate mortgage outstanding balance of $1.9 trillion (as per RBA figures from May 2021) – and assuming rates and loan balance don’t change – the Athena Home Loans research estimates that the cost of this “loyalty tax” is $9.1 billion.

On an average loan size of $400,000, the difference of 0.46 per cent on a 30-year loan means a customer would pay an additional $37,462 in interest over the life of the loan, or $1,249 per year, according to the research.

Nearly all of the borrowers surveyed (97 per cent) suggested that, if they were refunded the difference between their mortgage rate and new rates offered (the “loyalty cost”), they would use the money to pay down their loan faster.

According to the survey, more than half (56 per cent) of those surveyed said they felt trapped in their current deal, with just over a third (36 per cent) revealing that they had asked their lender for an interest rate reduction, but were rejected. 

Global chief executive of CoreData, Andrew Inwood said the research reveals the high emotion currently being felt by Australians toward home loan pricing by lenders.

He said: “This is a topic that customers get very angry about. Australians are crying out for greater transparency from their lenders and expect to be treated fairly. 

“The RBA reported the average difference in new and existing customer pricing to be 0.46 per cent for  owner-occupiers in June 2021. Sadly, for many customers it is even greater.”

Indeed, the Australian Competition and Consumer Commission (ACCC) recently found that, as at September 2020, borrowers with home loans between three to five years old paid, on average, about 58 basis points more than the average interest rate paid for new loans. 

Moreover, Lendi Group CEO David Hyman told the House of Representatives standing committee of economics in July that loyalty tax is a “real issue” and explained that borrowers refinancing their mortgages through Lendi Group brokers tend to save, on average, between 76 and 84 bps, depending on where they are in the loan cycle.

Mr Inwood continued: “We know transparency is at the heart of trust. There is enormous opportunity for those lenders with clear pricing and a simple value proposition. Those who reward loyalty, have an honest relationship with their customers, and do the right thing when nobody’s looking will win and is what consumers need right now.”

Athena CEO and co-founder Nathan Walsh added: “Aussie homeowners feel that their lender is taking advantage of them and are fed up. 

“The loyalty penalty rort costs customers billions of dollars a year. We think it’s time for this practice to stop, and homeowners agree.” 

Athena COO and co-founder Michael Starkey highlighted that the competition watchdog had made several recommendations in its 2020 Home Loan Price Inquiry – which included calling for all lenders to annually prompt borrowers with variable rate loans originated three or more years ago to review their mortgage.

While the recommendations were put to government in November 2020, no formal response has yet been made by Treasury.

Mr Starkey commented: “The ACCC made important recommendations in the report that have not yet translated to action. 

“We believe it did not go far enough to protect Aussie borrowers. 

“Transparency is key. Lenders should be required to disclose their rates for both new and existing customers, where they price them differently. Ninety-two per cent of home loan borrowers surveyed say they want this reform.”

Athena Home Loans CEO Mr Walsh concluded: “Aussie homeowners are right to feel outraged and deserve better. This is fundamentally a breach of trust. 

“Famous for being the land of the ‘fair go’, Australian homeowners are seeing the unfairness. They’ve been taken advantage of for too long and it’s time for change. 

“Rates are at an all-time low at the moment so it’s at a crucial time when Australians need the money in their pockets, not the banks.” 

He said that Athena, which last year launched a product suite that automatically drops the customer’s variable rates when they reach a new loan-to-value ratio (LVR) tier, aims to help Aussies pay down their home loan faster.

The direct-to-consumer lender estimates that since its launch in February 2019, it has saved customers $365 million over the life of their loans.

[Related: Lender to drop rates as borrowers pay off mortgage]