Knowledge Centre

Loyalty Tax

14/9/2023

Understanding Loyalty Tax: The Hidden Costs of Sticking Around

In the realm of home loans, loyalty often comes with a hidden price tag. While brand loyalty is highly valued and rewarded, it’s crucial for homeowners to understand the concept of “loyalty tax” that can impact their financial well-being. This article sheds light on this “tax” within the context of home loans, exploring its implications and providing insights to help borrowers make informed decisions.

What is the “loyalty tax”?

Do you ever wonder why the banks are raking in billions of dollars in profits every year? A large part of it is due to the loyalty tax – also known as the loyalty penalty or inertia pricing – which refers to a pricing practice where companies charge existing customers higher prices for their products or services compared to what they offer to new customers. This occurs when customers remain loyal to a particular brand, service, or subscription over an extended period of time without actively seeking out better deals or switching to competitors.

This applies to multiple service providers – from electricity to gas to telecommunications – but is particularly prevalent in the finance industry. Banks and lenders are renowned for taking advantage of customer loyalty and discouraging them from seeking better deals elsewhere.

The dynamics of loyalty tax in home loans

Loyalty tax in the mortgage industry can manifest in various ways, including:

• Interest Rate Disparities: Loyal customers who have maintained their home loans with the same lender for years will likely find themselves paying higher interest rates than newer customers. Financial institutions typically offer more competitive rates to attract new borrowers, inadvertently penalising those who have been loyal over the years.
• Limited Access to Deals: While new borrowers might enjoy exclusive deals, discounts, or refinancing options, loyal customers could be left out of such benefits, impacting their ability to optimise their loan terms. This is particularly true when it comes to refinance rebates for new bank customers.
• Hidden Charges: Over time, borrowers might encounter hidden fees or additional charges that were not part of their initial agreement. These costs can accumulate, contributing to a loyalty tax that long-term customers unknowingly bear.
• Stagnant Service: Lenders often focus their efforts on acquiring new customers, and in doing so neglect the needs of existing ones. This could result in reduced customer service quality or a lack of personalised attention for loyal homeowners.

Mitigating loyalty tax

For those navigating the home loan market, here are some strategies to mitigate the impact of loyalty tax:

• Seek Expert Advice: Consult with a mortgage broker to gain insights into the current market trends and available options.
• Regular Review: Periodically assess your home loan terms and interest rates. Compare them with prevailing market rates and offerings from other lenders to ensure you’re not paying more than necessary.
• Negotiating Power: Leverage your history with the lender to negotiate for better terms or interest rates. Loyal customers often have more room to bargain than they might realise. This is also known as repricing, which you can find more about here.
• Refinancing Consideration: Explore the possibility of refinancing your home loan with another lender. This can help you secure better rates and terms, potentially offsetting the effects of loyalty tax.

Balancing loyalty and financial well-being

The home loan market thrives on customer loyalty, but it’s imperative for both borrowers and lenders to strike a balance between loyalty and financial well-being. Lenders should recognise the value of retaining long-term customers and reward them appropriately. Conversely, borrowers should remain vigilant and informed about their loan terms and conditions, seeking transparency and fairness from their lenders.

Conclusion

Loyalty tax in the context of home loans is a nuanced concept that isn’t black and white. Homeowners and potential buyers should approach their lending relationships with awareness, diligence, and a willingness to explore alternatives!

By advocating for equitable treatment and maintaining a proactive stance, borrowers can navigate the complexities of loyalty tax, ensuring that their financial choices align with their long-term interests and goals.

And the best way to do this? Speak to your friendly Loan Co mortgage broker, who can do a free Home Loan Health Check for you to make sure you’re not being charged undue loyalty tax by your bank!