Loyalty tax evident as lenders discount rates for new customers

As borrowers focus on interest rate deals following four official cash rate rises, some lenders are offering lower home loan rates to new customers than they give their existing customers.

FBAA managing director Peter White (pictured above left) and RateCity.com.au research director Sally Tindall (pictured above right) say there can be a cost to lender loyalty and confirm the concept is not new. They suggest borrowers consider not just the upfront rate, but also the rate that a lender’s existing borrowers are paying before refinancing.

Following each of the last four RBA announcements, lenders announced that they would pass on the full increase to their variable home loan rates. As fixed rates move independently of the official cash rate, changes in funding costs have caused some lenders to reduce certain fixed rates.

According to current RateCity.com.au analysis, 24 lenders have lowered their variable home loan rates for new customers since May, including the four majors (CBA, NAB, Westpac and ANZ).

Read next: Is it time for official cash rate hikes to slow?

In response to MPA's questions about the bank’s current interest rate offers, Westpac confirmed new customers are offered an interest rate of 3.59% for two years and 3.99% thereafter, under the bank’s Flexi First Option.

A Westpac spokesperson told MPA the bank continued to offer customers competitive interest rates across its variable and fixed rate products.

“We encourage customers looking to refinance to Westpac or review their current loan with us, to have a discussion with their mortgage broker about their options or give us a call. We have a number of competitive offers currently including a four-year fixed rate of 4.99% p.a. for new or existing customers,” the spokesperson said.

Tindall told MPA existing mortgage rate customers had long been getting the “raw end of the deal.” Rate cuts can get expensive, particularly if applied across a lender's entire variable rate home loan book, so they are often reserved for new business, she said.

Two notable exceptions were Athena and Nano, which Tindall said had promised to keep their existing variable rate customers on the “exact same rate” as shown on their websites.

Tindall referred to RBA housing lending rates data, which she said highlighted the differences in lending rates for new and existing customers.

At the start of the data series in July 2019, the gap between outstanding loans and new loans funded (owner-occupier variable rates across all institutions) was 0.31%. In the June 2022 data series, the gap was 0.47%, the data shows.

“While the practice of front book (new business) and back book (existing business) pricing has been going on for years, the exact size of the problem has been difficult to define until recently,” Tindall said. “The reality is, most existing customers are on a slightly different rate to each other, based on when they took out their loan, how frequently their lender has changed their rate, how often they would negotiate and how successful they were at negotiating for this rate.”

Read next: Reserve Bank criticised over interest rate guidance

White told MPA he disagreed with lenders offering different rates for new and existing customers. This can occur where lenders price their existing book to offset a discount offered to new customers, he said.

“When the official cash rate goes down, the existing borrowers are always the last to benefit … conversely, when rates go up, they’re the first to take the hit,” White said.

Good rates come and go, representing a small moment in time for a borrower, who is likely to have committed to a mortgage for 25 or 30 years, he said.

“Even though the average life of a loan is still around four years, that just means it’s around four years before it gets changed or discharged … a mortgage is a long-term investment in yourself and what you’re borrowing,” White said.

He suggested brokers and their customers look at what existing borrowers are paying and how they are treated, as part of the refinancing process.

“If you look at the existing portfolio, what their existing borrowers are paying for an interest rate, they could be paying 25 basis points above everyone else … it’s cheap today but more expensive long-term,” White said.

The current interest rate environment provides an ideal opportunity for customers to shop around, Australian Banking Association CEO Anna Bligh said.

“In a rising interest rate environment, banks are still going to be very competitive about wanting to attract new customers, and there’s a role there for brokers,” Bligh said.