Once upon a time you were rewarded for loyalty. But borrowers with older mortgages are typically paying a higher interest rate than customers on new loans, confirms the Reserve Bank of Australia (RBA).

The RBA’s study finds that the difference in interest rates between new and outstanding variable-rate home loans increases with the age of the loan.

For example, for loans written four years ago, borrowers are charged an average of 40 basis points higher interest than new loans.

“For a loan balance of $250,000, this difference implies an extra $1,000 of interest payments per year,” explains the RBA.

And for loans more than eight-years-old, on average, you pay about 60 basis points more than a new customer.

What’s driving the difference?

The RBA says the difference in rates between older and newer mortgages can be partially explained by a shift in the mix of different types of variable-rate mortgages over time.

“In particular, the share of interest-only and investor loans in new lending has declined noticeably in recent years and these tend to have higher interest rates than other loans,” the RBA says.

“Nevertheless, even within given types of mortgages, older mortgages still tend to have higher interest rates than new mortgages.”

Strong competition for new borrowers

Here’s the real kicker, though. With competition for borrowers intensifying over recent years, banks are offering large discounts on their standard variable rates (SVRs).

What’s an SVR? It’s the reference rate that a bank prices its variable-rate loans against.

Basically, it’s the interest rate that banks and media quote when they report whether or not a rate cut is being passed through to customers.

But, as the RBA points out, very few borrowers actually pay interest rates as high as the SVR.

Instead, most borrowers are on advertised rates that are “materially lower” than a lender’s SVR, or have negotiated a further discount – and those discounts are getting bigger and bigger each year.

“In recent years, the average discounts relative to SVRs offered by major banks on new variable-rate mortgages have grown, widening from around 100 basis points in 2015 to more than 150 basis points in 2019,” the RBA says.

“By increasing the discounts on rates for new or refinancing borrowers over time, rather than lowering SVRs, banks are able to compete for new borrowers without lowering the interest rates charged to existing borrowers.”

Time to renegotiate?

The discounts borrowers receive on loans are usually fixed over the life of the loan. However, the good news is that they can be renegotiated.

“Well-informed borrowers have been able to negotiate a larger discount with their existing lender, without the need to refinance their loan,” explains the RBA.

So, if you’d like to put yourself into the RBA’s “well-informed borrower” category, then get in touch with us today.

We’d be more than happy to help you refinance your home loan, whether that be renegotiating with your current lender or looking around elsewhere.

A question that’s been popping up a bit lately has been ‘why didn’t my lender reduce my repayments when the interest rate fell last year?’

It’s a good and timely question considering the big four bank economists all expect the RBA to cut the cash rate by 25 basis points to a new record low of 0.5% on February 4.

So why don’t lenders drop your repayments when the interest rate falls?

This question was debated in November by the House of Representatives’ standing committee on economics during its review of Australia’s four major banks and other financial institutions.

In the red corner you have Dr Andrew Leigh MP, the committee’s deputy chair. In the blue corner you have ANZ CEO Shayne Elliott.

Dr Leigh suggested the bank’s default position – to keep repayments at the same level until the customer requested that they be reduced – was not in society’s best interest.

Essentially, Dr Leigh’s argument was that if banks automatically reduced the repayments then customers would have more money in their back pocket to spend each month. As such, the flow-on effect would have a more positive impact on the nation’s economy.

However, Mr Elliott strongly disagreed.

Mr Elliot said the bank’s default position – to keep repayments at the same level, regardless of the interest rate cuts – was in the customer’s best interest because it helped them repay their loan quicker.

“I find it hard to imagine that I could ever push an argument that it is in my customer’s interest to have [a loan] for longer,” said Mr Elliot.

“Maybe we can be better at communicating. But we contact every single customer every single time there is a rate cut and offer them a chance to review their interest rate and lower their payments.”

According to Mr Elliot, just 7% of home loan holders opted to reduce their repayments off the back of the interest rate cuts last year.

Want to reduce your repayments?

Now, we don’t advocate any particular side of the argument. Basically it will boil down to your individual situation and what you believe is in your best interests financially.

But if you do decide that you’d like to reduce your repayments then get in touch and we can help you make the request with your lender.