Bankers have rejected the idea that long-standing customers with mortgages are paying a “loyalty tax” in the form of higher rates than the rates new customers pay. But Reserve Bank analysis shows that is exactly what is happening.
According to Reserve Bank analysis in the latest Statement on Monetary Policy, new variable rate loans are typically offered at lower interest rates than outstanding variable rate loans, even for borrowers with similar characteristics.
“On average, for owner occupiers with variable rate loans, interest rates on new loans are currently around 30 bps below those of existing loans,” the RBA says.
Big bank chief executives appearing before the House of Representatives Economics Committee over the past couple of weeks have rejected the “loyalty tax” argument and the implication they were profiteering.
NAB chief executive Phil Chronican said the difference in rates being paid by existing customers and new borrowers was not as great as some have suggested.
ANZ boss Shayne Elliott said the difference was less than 30 basis points and in the case of some products the difference is less than 10 basis points.
The RBA says: “Households obtaining new loans, refinancing existing loans or negotiating a better deal with the existing lender tend to receive lower rates that existing borrowers who do not alter their original loan arrangements. This reflects strong competition among lenders for high-quality borrowers.”
The average discount to the standard variable rate that owner occupiers are paying on their mortgages is currently 120 basis points and new borrowers are receiving a further discount of around 30 bps.
Similar discounts for new loans are evident for other loan types, such as investor and interest-only loans.
The RBA says banks have on average passed through 60 basis points of the 75 bps reduction in the cash rate this year.
Speaking at a Finsia lunch in Sydney last week, Reserve Bank deputy governor Guy Debelle said: “Sixty of the 75 basis points of cash rate cuts are reflected in borrowers’ mortgage rates. Over time people get the full 75 basis points by refinancing to lower rates.”