Avoid the ‘Loyalty Tax’: Why Reviewing Your Mortgage Regularly Matters

Home Loans

6 Oct

If you've had your mortgage for a while, you might be paying more than necessary without realising it. This extra cost is often referred to as the 'loyalty tax', a term used to describe the higher interest rates loyal customers pay compared to new borrowers. In Australia, this can mean paying an additional $3,000 to $6,000 annually on an average mortgage of $611,000. Regularly reviewing your mortgage can help you avoid this unnecessary expense and ensure your loan continues to meet your financial needs.

Understanding the ‘Loyalty Tax’

The 'loyalty tax' occurs when existing customers are charged higher interest rates than new customers. Banks often offer competitive rates to attract new clients but may not extend the same offers to current borrowers. This discrepancy can lead to significant overpayments over time. For example, if your interest rate is 1% higher than the current market rate, you could be paying thousands more each year.

Why Regular Mortgage Reviews Are Essential

Interest Rate Fluctuations
Interest rates can change due to various factors, including economic conditions and monetary policy adjustments. If your mortgage rate is higher than the current market rate, refinancing could lower your monthly payments and reduce the total interest paid over the life of the loan.
Changes in Financial Circumstances
Life events such as a change in income, family size, or financial goals can impact your ability to manage mortgage repayments. Regular reviews allow you to adjust your mortgage terms to better align with your current situation.
Access to Better Loan Products
The mortgage market is competitive, with lenders frequently introducing new products and incentives. By reviewing your mortgage, you can identify opportunities to switch to a loan that offers better features or lower costs.
Avoiding Unnecessary Fees
Some mortgage products include fees for features you may not need or use. Regularly assessing your mortgage can help you eliminate unnecessary costs and ensure you're only paying for features that benefit you.

When to Review Your Mortgage

Annually: An annual review helps you stay informed about changes in interest rates and loan products.
At Mortgage Renewal: When your mortgage term ends, it's an ideal time to reassess your loan and explore better options.
After Significant Life Changes: Events such as marriage, the birth of a child, or a change in employment can affect your financial situation and mortgage needs.
When Market Conditions Change: Economic shifts can lead to lower interest rates, presenting opportunities to refinance at a better rate.

Conclusion

Regularly reviewing your mortgage is a proactive step in managing your finances effectively. By staying informed and making adjustments as needed, you can avoid the 'loyalty tax' and ensure your mortgage continues to serve your best interests. Remember, your mortgage is a significant financial commitment, and it's worth taking the time to ensure it's the right fit for you.