Investors bear brunt of ‘loyalty tax’

For owner-occupiers, borrowers with newly originated loans were paying an average interest rate of 3.28 per cent, compared with existing customers with an average interest rate of 3.61 per cent – a pricing differential of 33 bps.

The gap widens among investors, with new customers charged an average interest rate of 3.65 per cent, while existing customers were charged an average of 4.01 per cent – 36 bps higher.

However, while what some have described as a “loyalty tax” is steeper among loyal investors, the RBA data also revealed that such borrowers received the sharpest rate cuts following the third cut to the cash rate in October.

Investors with more mature home loans received a rate cut of approximately 24 bps following the RBA’s cash rate reduction, while lenders passed on an average of 18 bps to investors with newly originated home loans.

In comparison, new owner-occupied customers received a rate cut of 16 bps in October, while existing customers have 13 bps shaved off their interest rate.

Data prompts call for switching

The RBA data found that the pricing differential blows out to 40 bps when comparing all newly originated variable rate home loans to those originated more than four years prior.

The central bank has largely attributed the disparity to aggressive discounting behaviour from lenders in recent years amid fierce competition for new borrowers.

According to the data, the average discounts on standard variable rates offered by major banks on new loans increased from approximately 100 bps in 2015 to an average of approximately 175 bps in 2019.

Drawing on the research in his appearance before the House of Representatives standing committee on economics, RBA governor Philip Lowe encouraged mortgage-holders to capitalise on the competitive dynamic in the market by reviewing their interest rate and refinance to a better deal.

“As I have said a number of times recently, if you took your loan out a while ago, it is worth shopping around and checking in with your lender to see if it can now give you a bigger discount,” he said.

This comes amid the Australian Competition and Consumer Commission’s (ACCC) Home Loan Price Inquiry.

The inquiry – commissioned by Treasurer Josh Frydenberg after lenders failed to pass on the RBA’s cuts to the cash rate in full – will review pricing behaviour from 1 January 2019 to examine:

• the differences between advertised rates and the prices actually charged or paid;
• the differences between rates paid by existing customers and those paid by new customers (front and back book pricing behaviour);
• pricing decisions in response to changes to the official cash rate; and
• factors preventing customers from switching to cheaper home loans.

In exploring these matters, the ACCC will consider consumer decision making and biases, information used by consumers and the extent to which lenders may contribute to consumers paying more than they need to for home loans.

The announcement of the inquiry was met with stiff criticism from some sections of the banking community, including CEOs of the big four banks, who rejected suggestions that their pricing behaviour was anti-competitive.

The ACCC is expected to hand down a preliminary report by 30 March 2020, with a final report due by 30 September 2020.