Lender loyalty tax persists in impacting borrowers

As such, lender loyalty tax continues to weigh heavily on borrowers, shaping a challenging landscape for those seeking financial stability in the housing market.

As of November 2023, existing borrowers still faced rates 0.29 bps higher on average than new borrowers, marking a slight improvement from 2022’s median lender loyalty tax across all lenders, which stood at 1.25 bps.

The disparity between lender loyalty taxes was notable in 2023, with a 0.30-bp difference between customers in the big four banks compared to 0.15 bps for the non-majors.

Lendi Group co-founder and chief executive David Hyman pointed out while 29 bps might not sound like life-changing money, refinancing and saving this amount can offset an entire rate increase.

This issue is exacerbated by inflation, which, despite decreasing from its December 2022 peak of 7.8 per cent to 5.4 per cent in the September quarter, has contributed to a 1.63 per cent rise in the median variable mortgage rate for owner-occupiers in 2023.

Consequently, the average variable interest rate surged to 6.97 per cent in 2023 from 5.34 per cent in 2022.

“Every rate increase in 2023 has led to more conversations between our brokers and people that have woken up to the difficulties of the current market,” Mr Hyman said.

“This is why it is crucial for home owners to challenge the status quo and reclaim their agency, to ensure they are getting the best deal in a difficult market.”

Cube Central broker and BDM Scott Beattie highlighted several factors impacting clients’ ability to obtain a better deal.

Some lenders refrain from offering rate reviews or their best rates until a discharge is initiated.

Additionally, costs associated with discharges, government charges, and new lender set-up fees sometimes render changing lenders prohibitive, especially for smaller loans.

Moreover, Mr Beattie noted that certain lenders make the process intentionally difficult for clients.

“Some lenders make the client call to make the process difficult and or lengthy so the customer just finds the process [too] hard and ‘loses interest’ – literally,” Mr Beattie emphasised.

He specifically mentioned the Commonwealth Bank’s lack of competitive retention pricing and direct contact with clients after a discharge request.

“When you lodge a discharge, (after going through the refinance process), CBA’s retention team contact the client with the suggested wording to send to the broker to push them out of the loop,” Mr Beattie said.

“If retention pricing hasn’t been requested, then that’s almost fair enough, but why is a bank not held accountable for not offering a better deal in the first place?

“In my opinion, it’s purely the bank relying on the customer going elsewhere and lodging a discharge before they put their best foot forward and is something that needs to be tightened up by regulators, especially in light of the significant bank profits.”

However, he acknowledged that some clients might not be in a position to refinance due to reasons such as high loan-to-value ratios (LVRs) or insufficient income to support a lower-rate loan.

The Lendi report showed that over the course of 2023, the median income for borrowers fell by 3 per cent to $95,000.

This decline occurred despite a 40 per cent increase in variable mortgage rates for owner-occupiers throughout the year, amounting to $528 extra per month on a $500,000 variable principal & interest (P&I) loan.

Furthermore, it highlighted that just 4 per cent of new purchases were made in the 95–100 per cent loan-to-value ratio (LVR) range, with 2 per cent more buyers purchasing in the 70–80 per cent LVR band compared to 2022.

Given the challenges faced by borrowers, Mr Beattie stated that he’s been conducting rate reviews, assuming the client’s bank allows it, to perform a comprehensive market comparison of all lenders and provide recommendations regarding potential refinancing considerations.

[Related: Nearly all brokers have mortgage prisoner clients: Broker Pulse]