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Homeowners pay $5k extra in interest on loan over three years unnecessarily

Sitting back and watching the interest rate rise on your home loan could be costing you hundreds of dollars more a month unnecessarily.

Homeowners are being warned not to fall victim to a “mortgage loyalty tax” by staying with their current lender as banks offer discounts and perks to compete for new customers.

Analysis by RateCity shows all four major banks are offering new customers a significantly lower variable rate than existing customers who have not “haggled” for something better.

The financial comparison site found someone who took out a variable rate loan in September 2019 could be paying an interest rate that’s almost a full percentage point higher than a new customer today.

Looking at Australia’s largest bank as an example, RateCity estimates a Commonwealth Bank customer who took out a $500,000 loan three years ago would have paid an extra $5101 in interest over that time if they had not negotiated.

For a $750,000 loan it is an extra $7,652 in interest and for a $1 million loan it is $10,202.

RateCity explained that in those three years, the bank offered discounts on its lowest variable rates five times to new customers, which meant unless an existing customer called up their bank and negotiated each time, they missed out 0.93 percentage points off their rate.

Addressing RateCity’s findings, Commonwealth Bank said in a statement it was committed to providing existing and new customers with “an array of great value and flexible home loan products”.

It highlighted its “Green Home Offer” where existing customers have access to a low standard variable rate if their home meets certain sustainability and energy efficient criteria.

“We encourage our customers to reach out to us to see how our extensive network of home lending specialists are able to help them find the right solution for their needs,” A CBA spokeswoman said.

The Reserve Bank of Australia increased the official cash rate by 0.50 per cent on Tuesday – the fourth hike in four months.

While the major banks have passed on the rate rises in full to existing customers, they are still offering discounts to bring in new business.

RateCity research director Sally Tindall said banks were “falling over themselves” to offer discounts and perks to borrowers willing to move from a competitor.

“Once the August hikes filter through, a competitive interest rate for owner-occupiers is likely to be around 3.50 per cent,” she said.

“If your variable rate starts with a 4 or even a 5, then you really should question why.”

RateCity found at least 10 lenders have cut variable rates since the hikes began, but only for new customers.

The value of refinanced loans surged by $1.06 billion to $18.16 billion in June, according to the Australian Bureau of Statistics. That is the highest value on record.

As well as rate hikes prompting mortgage customers to shop around, Ms Tindall said many borrowers would be coming off low fixed rate contracts they signed up for during Covid.

“Refinancing hit a record high in June and we expect this will keep on climbing as borrowers roll off their fixed loans, only to find rates have gone through the roof since they last looked at their mortgage,” she said.

“This will in turn push the banks to come up with even more discounts and perks for new customers, particularly refinancers looking to jump ship from a competitor.”

Customers also have the option to call up their bank and negotiate a better interest rate.

“If you do go down this path, do your research before you make the call,” Ms Tindall warned.

“Check what rate you’re on, check what rate your bank is offering new customers, but also what other lenders might be willing to offer you.

“If you have a couple of quotes at the ready for some of your bank’s competitors, they’re likely to take notice.”

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RBA interest rates: Westpac decreases fixed rates as three big banks pass on full 0.50 percentage point rate hike

Westpac Bank has made a surprising move, choosing to spare some customers from escalating price hike pain.

The big bank has announced it will be decreasing its four-year owner occupied fixed interest rate by one per cent, down to 4.99.

Westpac is the third of the big banks to announce its rate changes following the Reserve Bank of Australia’s decision to increase the official cash rate by 0.50% per annum (pa) on Tuesday.

The big bank has unsurprisingly followed its rivals the Commonwealth Bank and ANZ in increasing its variable home loan interest rates.

The interest rate changes will come into effect for new and existing home loan variable rate products on Thursday, August 18.

Earlier today, ANZ joined CBA in announcing it will be passing on the hike to variable rate mortgages and one savings account by the full 0.50 percentage points.

The major bank said its up-scaled up mortgage rates will come into effect for both new and existing customers from Friday, August 12.

The lowest variable rate will now be increased to 3.69 per cent – ​​just under that of CBA, which pumped up its lowest rate to 3.79 per cent.

Both rates are at three-year highs.

The ANZ decision also included increasing the rate on its new ANZ Plus Save account by 0.50 percentage points to 2.50 per cent for balances up to $250,000, which will come into place on Monday.

The move came just hours after Australia’s biggest bank, the Commonwealth Bank, announced it will pass on the full 0.50 percentage point hike to its variable home loan customers and some savings customers.

CBA will bring its occupier principal and interest standard variable home loans rate to 5.8 per cent.

Uncharacteristically, Australia’s other big banks have been slow off the blocks following the RBA’s decision on Tuesday, with CBA’s competitors Westpac, NAB and ANZ yet to make their announcements.

Mortgage rates for new and existing customers at CBA will rise by 0.50 percentage points on August 12, with investor rates rising to 6.38 per cent.

Research director at RateCity.com.au Sally Tindall said while the CBA’s decision comes as no surprise, for customers who are already feeling the heat, this fourth hike is a “difficult pill to swallow”.

“From next week, CBA’s basic variable rate will hit a three-year high of 3.79 per cent – ​​a huge increase from three months ago when it was just 2.19 per cent,” she said.

For an owner-occupier with $500,000 debt and 25 years remaining, the 0.5 percentage point hike means they will see their monthly repayments rise by $140.

To ease the strain, Commonwealth Bank is cutting its lowest four-year fixed rate to 4.99 per cent – ​​a drop of 1.60 percentage points.

This special rate, which comes into play on Friday, is strictly for owner-occupiers paying principal and interest on a package rate ($395 annual fee) for a limited time.

While Ms Tindall said the “whopping cut” will make it the lowest in its category, she warned it may not necessarily be a good idea.

“People should think carefully about whether they want to lock up their mortgage for the next four years because there can be significant consequences if they decide to break their loan,” she said.

For those with a NetBank Saver account, who will see the full rate hike, the research director said an ongoing rate of just 0.85 still won’t cut it.

“In this market, where we could see ongoing rates over 3 per cent, these savers are still getting paid peanuts,” she said.

But Ms Tindall said there are signs things could be turning around.

“On Tuesday, Macquarie announced it was making significant cuts to its fixed rates and now CBA is following suit,” she said.

“We expect this will trigger further fixed rate cuts from other lenders in response to both evolving market expectations and competition among the banks.”

Read related topics:westpac

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