Australian banks consistently offer lower interest rates to new borrowers than to existing customers. This gap is called the loyalty tax. The Australian Competition and Consumer Commission investigated it formally in 2020 and found the average gap between existing and new customer rates was 0.26 to 0.51 percentage points, depending on the lender and loan type. On a typical mortgage, that costs existing borrowers $1,000 to $2,500 per year compared to what a new customer with the same loan profile pays.
Banks price mortgages for customer acquisition. New customers are won through competitive rates. Existing customers are retained through inertia. Banks know that most borrowers do not review their rate regularly and find refinancing inconvenient. So banks offer their best rates to attract new borrowers and quietly let existing customers sit on higher rates.
This is not coincidental. APRA data has consistently shown that the average existing variable rate borrower pays more than the average new borrower with the same loan-to-value ratio and risk profile. The gap persists because the cost of switching is real (time, paperwork, discharge fees) and most borrowers do not go to the effort of addressing it.
Find your current interest rate on your loan statement or in your banking app. Then find the best advertised rate for a new customer with your loan profile: owner-occupier or investor, principal-and-interest or interest-only, and roughly your loan-to-value ratio.
The calculation is straightforward. If your current rate is 6.40% p.a. and the best comparable new customer rate is 5.99% p.a., the gap is 0.41%. On a $600,000 outstanding balance, that is $2,460 per year in extra interest. Over five years at that gap, you pay an extra $12,300 compared to a new customer who takes out the same loan today.
The gap also compounds over time as the principal reduces more slowly at the higher rate, adding to the total cost.
The simplest fix is to call your bank and ask for a rate reduction. This works more often than most borrowers expect. Banks would rather reduce your rate by 0.20 to 0.30 percentage points than lose the loan entirely to a competitor.
When you call, be specific. Tell them the best rate you have found elsewhere for a comparable loan. Tell them you are considering refinancing if your current rate is not competitive. Ask to speak to the retention team rather than the general customer service line. Retention staff typically have more discretion to offer rate adjustments.
ASIC has noted that borrowers who contact their lender are more likely to receive a rate reduction than those who do not. The ACCC found that about one in three borrowers who asked received a rate reduction in the period studied.
If your bank refuses to match the market rate or offers a reduction smaller than the gap justifies, refinancing is the more effective solution. The costs of refinancing include discharge fees from your current lender (typically $150 to $400), application or settlement fees from the new lender (often waived or offset by cashback offers), and government fees for mortgage registration (approximately $100 to $400 depending on your state).
The break-even calculation: if refinancing costs you $1,500 all-in and you save $2,400 per year by moving to a lower rate, you recover the switching cost in 7.5 months. Beyond that, every month at the lower rate is a net saving.
Cashback refinance offers from some lenders (which have ranged from $2,000 to $4,000 at various points) can further reduce or eliminate the switching cost. These come and go, so check current offers when you begin a comparison.
Mortgage rates move with the RBA cash rate and with lender competition. Reviewing your rate every 12 months is a reasonable baseline. If the RBA has cut rates and your lender has not passed them on fully, that is an immediate trigger to negotiate or compare. If you have not reviewed your rate in more than two years, start now.
The loyalty tax is not a once-off problem. It accumulates every month you pay a rate that is above what a new customer would receive. The longer the gap persists, the more it costs.
See how your current mortgage rate compares to what new customers pay today.
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