Borrowers who took out home loans during the low-interest rate period of early 2022 may now be paying far more than necessary by not renegotiating their loan. While it can be easier to let the rate adjust in line with changes from the Reserve Bank, remaining inactive could result in a serious financial loss.
Interest rates have risen sharply since April 2022 when borrowers could access rates as low as 2.86%. Today, those same loans could be charging roughly 6.36% if the rate has not been updated. Meanwhile, banks are offering new or proactive customers rates as low as 5.25% - a difference that could lead to a significant financial burden over the life of the loan.
For instance, on a $1 million mortgage, changing from a 6.36% rate to 5.25% could save $376,800 and reduce the loan period by more than five years. Even dropping from the current average rate of 5.53% to 5.25% could result in savings of around $142,708, depending on repayment behaviour and changes to rates over time.
This situation is often described as a "loyalty tax" which is the cost of staying with a provider for too long without reviewing the loan rate. While over a million existing loans have been renegotiated since rate rises began, many others have not, leaving borrowers paying more than they should.
The Reserve Bank has kept the cash rate steady at 3.6% and with most major banks expecting just one more official cut, the chance to benefit from falling rates may soon pass. Now is a critical time for homeowners to compare available loans and consider switching or asking for a better deal from their lender.
Securing a lower rate usually involves some preparation. This might include researching other lenders' rates, contacting a broker or calling the bank directly. In many cases, borrowers may need to speak with a retention team to obtain a more competitive rate, especially if they have stayed with one of the major banks.
Smaller lenders and credit unions can also offer strong refinancing deals. The key message is clear: staying loyal without checking can be costly, and staying informed can deliver major benefits.
