When you take out a home loan, you might assume that your bank is providing you with the best possible deal. After all, they're your lender, and you've been a loyal customer for years. However, what you might not realise is that your loyalty could be costing you money in the form of what's known as the "bank loyalty tax."

In this blog post, we'll explain what the bank loyalty tax is, how it affects borrowers in Australia, and most importantly, how to avoid it.

What is the Bank Loyalty Tax?

The bank loyalty tax refers to the extra amount of money that long-term borrowers pay on their home loans compared to new customers. Essentially, the longer you've been with your bank, the more you're likely to be charged in fees and interest rates. It's a way for banks to make up for the cost of acquiring new customers, and to take advantage of the fact that many borrowers simply don't shop around for a better deal.

Examples of the Bank Loyalty Tax in Action

To understand how the bank loyalty tax can impact borrowers, let's look at some examples. John and Jane are both borrowing $500,000 over 30 years. John is a new customer and has negotiated a low interest rate of 3.5%. Jane, on the other hand, has been with her bank for 10 years and is paying an interest rate of 4%. Over the life of their loans, John will pay a total of $277,000 in interest, while Jane will pay $348,000. That's a difference of $71,000!

How to Calculate the Bank Loyalty Tax

So how can you calculate how much you're paying in bank loyalty tax? The first step is to determine your current interest rate, as well as any fees you're being charged on your home loan. Then, you'll need to research what other lenders are currently offering for a similar loan. If you find that you're paying significantly more than what other lenders are charging, it's a good indication that you're being hit with the bank loyalty tax.

Example of Calculating the Bank Loyalty Tax

Let's assume that you have been with your current bank for 10 years and you have a home loan of $500,000 over a 30-year term. Your current interest rate is 4%, and you're being charged an annual fee of $500.

To calculate the total cost of your home loan, we'll need to consider both the interest and the fees. Over the life of the loan, you'll be paying a total of $348,000 in interest. You'll also be paying a total of $5,000 in annual fees ($500 per year for 10 years).

Now let's compare this to what a new customer might pay. If a new customer were to borrow $500,000 over 30 years, they might be able to negotiate a lower interest rate of 3.5% and avoid any annual fees altogether. Over the life of their loan, they would pay a total of $277,000 in interest.

The difference between what you're paying and what a new customer would pay is what we call the bank loyalty tax. In this case, you're paying an extra $71,000 in interest and fees over the life of your loan. That's a significant amount of money, and it's all because you've been with your bank for a long time. It’s important to note that simply by being with one lender for a long period of time doesn’t guarantee you’ll pay more, but inaction and not reviewing your rates is very likely to do so.

How to Avoid the Bank Loyalty Tax

The good news is that there are several ways to avoid the bank loyalty tax and get a better deal on your home loan. The first is to simply shop around and compare different lenders. You might be surprised to find that you can get a much lower interest rate and fewer fees by switching to a different bank. Alternatively, you can negotiate with your current bank and ask them to match the rates offered by their competitors. Many banks are willing to do this in order to keep their customers.

Another option is to refinance your home loan. This involves switching your loan to a different lender altogether. While it can be a bit of a hassle, it can also result in significant savings over the life of your loan. Just be sure to factor in any exit fees or other costs associated with refinancing before you make the switch.

Conclusion

If you're a long-term borrower in Australia, chances are you're paying more than you need to on your home loan thanks to the bank loyalty tax. By understanding what it is and how it works, you can take steps to avoid it and save yourself thousands of dollars over the life of your loan.

So don't be afraid to shop around, negotiate with your bank, reach out to your Mortgage Broker, or refinance your loan if it means getting a better deal. After all, your loyalty should be rewarded, not taxed.

Ally Home Loans Pty Ltd is your ally in finance for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.

Book an obligation-free, complimentary consultation here today.

Ally Home Loans Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.