It’s official: Comparing home loans saves you big money
One of the worst ways you can treat loyal customers is charging them more than new customers for your product, but this often happens with home loans.
New customers are routinely offered a much better or cheaper mortgage than existing borrowers by banks and lenders. In a fiercely competitive mortgage market, lenders are often willing to dangle a cut-price carrot to lock in new business.
They won't dangle the same carrot to keep your business, though.
Recent research from the Australian Competition and Consumer Commission's (ACCC) shows that borrowers with a home loan 3+ years old are paying an average of 0.58% more in interest, translating to thousands of extra dollars.
The good news? You can easily work out if you're overpaying for your mortgage – and take swift steps to start saving money right away.
How much more are you (needlessly) paying for your mortgage?
Much, much more than you should be okay with.
I'm talking about thousands, tens of thousands or potentially even hundreds of thousands of dollars across your loan period (depending on your loan amount and remaining loan term).
The exact amount of extra money you could be handing over to your bank (for no good reason) is up for debate.
The Australian Financial Review pointed out that the ACCC used an "apples vs oranges" comparison in their research: they compared existing variable home loan rates with a blend of new fixed and variable rates to calculate the 0.58% gap between older and newer loans. If new variable home loan rates were compared to existing variable mortgage rates, they report, then the saving would be around 0.30%.
ACCC chairman Rod Sims told the AFR a "judgment call" was involved in the comparisons, and the bottom line is that "many people think home loans are 'set and forget', but we're saying there are gains to be made [by switching]".
I agree with Sims. Regardless of the methodologies used, the point the ACCC is making is clear: existing customers don't get the red carpet rolled out for them the same way that new customers do, and it's costing borrowers real money.
I reached out to the ACCC to find out just how much Aussies are over-spending in mortgage interest. They confirmed that "as borrowers' loans get older, the gap between what they pay and what borrowers with new loans pay widens".
"Many borrowers could achieve significant savings"
"A significant number of borrowers have not switched lenders for several years. As at December 2019, almost half of all variable rate loans were originated at least four years ago," an ACCC spokesperson told Finder.
"Many of those borrowers with older home loans could achieve significant savings if they switched to a new home loan or negotiated with their lender to seek an interest rate similar to that on a new loan."
The ACCC also told Finder, "Deciding to engage in the market to look for a better offer is the first stage of the switching process. As such, a lack of engagement in the home loan market is a significant barrier to borrowers switching lenders. The ACCC thinks that the annual prompt for borrowers with older home loans that we have proposed will encourage this engagement by borrowers."
How to tell if you're paying too much for your mortgage
There's an easy way to make sure you're not paying too much. For as long as I've been writing about home loans – the better part of a decade and a half – I've encouraged people to pick up the phone, call your bank and ask.
It's quick, it's free and you have nothing to lose. So step one is to call your lender. Immediately.
Ask to speak to "retention". This usually connects you with an eager staff member armed with authority to give you an interest rate discount to make sure you don't refinance to a different lender.
"Many existing borrowers should be able to achieve significant savings by switching lenders or negotiating with their existing lender to receive an interest rate similar to that on offer for new loans," the ACCC spokesperson told Finder.
If they still don't budge, you're not stuck paying more for your mortgage. Just note your interest rate, start comparing and refinance your loan. Odds are, you'll be able to find a better deal, perhaps one with a cashback offer, so you can start paying less for your home loan.
If you're not reviewing your loan annually, you are needlessly spending more on your home loan than you need to. You wouldn't happily hand over $150 for a Jetstar flight that they're also selling for $120. You wouldn't pay $19,990 for a new car that the manufacturer is also advertising at $18,990. So why pay more for your home loan?