If you have held your home loan with the same bank for a while, chances are you are paying loyalty tax which could cost you thousands of extra dollars each year.
In this article, we cover what loyalty tax is, the impact is has on Australians and how you can protect yourself and avoid loyalty tax.
What is a loyalty tax?
Loyalty tax is a term used to describe the practice of charging higher interest rates and fees to long-term customers, who have been loyal to a bank or financial institution for many years.
This practice can impact borrowers in Australia, and can result in higher costs and lower returns on their home loan, mortgage, or other financial products.
According to data from the Australian Securities and Investments Commission (ASIC), loyalty tax is a widespread practice in Australia, with many banks and financial institutions charging higher interest rates and fees to their long-term customers.
For example, ASIC data shows that the average interest rate for a standard variable home loan in Australia is 2.5%, but some banks charge rates as high as 4% or 5% to their long-term customers.
Similarly, ASIC data shows that the average fee for a home loan in Australia is $550, but some banks charge fees as high as $1,000 or more to their long-term customers.
Impact on Australians
The impact of loyalty tax on borrowers in Australia can be significant, and can result in higher costs and lower returns on their home loan, mortgage, or other financial products.
For example, a borrower with a $400,000 home loan, at an interest rate of 2.5%, will pay around $22,000 in interest over the first year of the loan.
However, if that same borrower is charged a higher interest rate of 4%, due to loyalty tax, they will pay around $37,000 in interest over the first year of the loan, an increase of $15,000.
Why do banks charge a loyalty tax?
There are several reasons why banks and financial institutions charge loyalty tax to their long-term customers.
One reason is that long-term customers may be less likely to shop around for a better deal, as they are more loyal to the bank or institution that they have been dealing with for many years.
This can make long-term customers more valuable to the bank or institution, as they are less likely to switch to a different provider, even if they are offered a lower interest rate or better terms.
Another reason why banks charge loyalty tax is to compensate for the lower profit margins on home loans, mortgages, and other financial products. These products are typically low-risk and low-return, and do not generate as much profit for the bank as other, riskier products, such as credit cards or personal loans. By charging higher interest rates and fees to long-term customers, banks can increase their profit margins on these products, and offset the lower returns.
Finally, banks may charge loyalty tax to their long-term customers as a way to encourage them to switch to different, more profitable products, such as credit cards or personal loans.
By offering lower interest rates and better terms on these products, banks can entice their long-term customers to switch, and generate more profit from these products.
How do banks get away with it?
There are multiple reasons banks and other financial institutions are able to get away with charging loyalty tax to their long-term customers.
1/ loyalty tax is often hidden in the fine print of the contract, and is not clearly disclosed to the borrower. This can make it difficult for the borrower to understand the full implications of loyalty tax, and to compare different offers from different banks and institutions.
2/ Charging loyalty tax is not illegal in Australia. While there are laws and regulations that prohibit banks from engaging in deceptive and misleading conduct, there are no specific laws that prohibit loyalty tax.
This means that banks and other financial institutions are able to charge higher rates and fees to long-term customers, as long as they are not engaging in deceptive or misleading conduct.
3/ It is usually difficult for borrowers to switch to a different bank or institution. Many borrowers have a long-term relationship with their bank or institution, and may have multiple financial products, such as a home loan, mortgage, credit card, and personal loan, with the same provider.
This makes it difficult for the borrower to switch to a different provider, and to avoid the negative effects of loyalty tax.
Finally, banks are able to get away with charging loyalty tax because there is limited competition and choice in the financial sector. Many banks and other financial institutions are large, well-established players, with significant market share and resources. This can make it difficult for smaller, challenger banks and institutions to compete, and to offer lower rates and fees to customers.
Are there laws about loyalty tax?
As mentioned above, there are no specific laws in Australia that prohibit loyalty tax. While there are laws and regulations that prohibit banks and financial institutions from engaging in deceptive and misleading conduct, there are no laws that specifically address loyalty tax.
This means that banks and financial institutions are able to charge higher rates and fees to long-term customers, as long as they are not engaging in deceptive or misleading conduct.
However, there are other laws and regulations that can provide some protection against loyalty tax, and that can help borrowers avoid its negative effects. For example, the Australian Securities and Investments Commission (ASIC) has powers to investigate and enforce the law against banks and other financial institutions that engage in deceptive or misleading conduct.
This means that if a bank or institution is found to be charging loyalty tax in a deceptive or misleading manner, ASIC can take action to protect consumers and ensure that the bank or institution is held accountable.
In addition, there are also consumer protection laws in Australia that provide some protection against loyalty tax. For example, the Australian Consumer Law (ACL) prohibits businesses from engaging in conduct that is misleading or deceptive, or that is likely to mislead or deceive consumers. This means that if a bank or institution is charging loyalty tax in a way that is misleading or deceptive, the borrower can make a complaint to the Australian Competition and Consumer Commission (ACCC), and seek compensation or other remedies.
Consequences of paying a loyalty tax?
The consequences of loyalty tax can be significant for borrowers, and can result in higher costs and lower returns on their home loan, mortgage, or other financial products. Some of the key consequences of loyalty tax include:
- Higher interest rates and fees: The most obvious consequence of loyalty tax is that it can result in higher interest rates and fees for long-term customers. This can increase the overall cost of the home loan, mortgage, or other financial product, and can make it more difficult for the borrower to repay the loan or maintain their financial obligations.
- Lower returns on investment: Another consequence of loyalty tax is that it can result in lower returns on investment for the borrower. For example, a borrower with a $400,000 home loan, at an interest rate of 2.5%, will pay around $22,000 in interest over the first year of the loan. However, if that same borrower is charged a higher interest rate of 4%, due to loyalty tax, they will pay around $37,000 in interest over the first year of the loan, an increase of $15,000. This can reduce the return on the borrower's investment, and can affect their financial well-being.
- Reduced ability to save and invest: A third consequence of loyalty tax is that it can reduce the borrower's ability to save and invest. By paying higher interest rates and fees, the borrower has less money available for other expenses, such as groceries, bills, or savings. This can limit the borrower's ability to save and invest, and can affect their financial stability and security.
- Reduced confidence and trust in the financial system: Finally, loyalty tax can have a negative impact on the borrower's confidence and trust in the financial system. By charging higher rates and fees to long-term customers, banks and other financial institutions can erode the trust and confidence of their customers, and create a sense of unfairness and injustice. This can have long-term consequences for the financial system, and can affect the borrower's relationship with their bank or institution.
In addition to the consequences outlined above, loyalty tax can also have broader economic and social implications. For example, loyalty tax can contribute to income inequality, as it disproportionately affects lower-income borrowers, who are more likely to be charged higher rates and fees. This can exacerbate the existing gap between rich and poor, and can have negative consequences for social cohesion and stability.
Loyalty tax can also have negative effects on competition and innovation in the financial sector. By charging higher rates and fees to long-term customers, banks and other financial institutions can discourage competition and innovation, and reduce the availability of better deals and products for consumers. This can limit the choices and options available to borrowers, and can prevent the financial sector from adapting and evolving to meet the changing needs and preferences of consumers.
Finally, loyalty tax can have negative effects on the overall economy, by reducing the spending power and consumption of households. By charging higher rates and fees, banks and other financial institutions can reduce the disposable income of households, and limit their ability to spend and invest in the economy. This can affect economic growth and development, and can have negative consequences for the broader community.
How to protect yourself from paying a loyalty tax?
Despite the prevalence of loyalty tax in Australia, there are ways that borrowers can protect themselves against this practice.
- Shop around and compare offers: The first step to avoid loyalty tax is to regularly review your home loan, personal loan and other financial products, and compare the rates and fees offered by different banks and institutions. By shopping around and comparing offers, you can make sure that you are not being charged higher rates and fees due to loyalty tax. Joust can help you find the most competitive home loan rates available to your requirements.
- Negotiate with your bank or institution: Another way to avoid loyalty tax is to negotiate with your bank or institution, and ask for a lower interest rate or better terms. Many banks and institutions are willing to negotiate, and may offer a lower interest rate or better terms to retain their long-term customers.
- Switch to a different bank or institution: If your current bank or institution is charging you higher rates and fees due to loyalty tax, you may want to consider switching to a different provider. By switching to a different bank or institution, you can take advantage of lower rates and better terms, and avoid the negative impact of loyalty tax.
- Consider alternative financing options: In addition to traditional banks and institutions, there are also other financing options available, such as peer-to-peer lending, online lenders, and credit unions. These alternative financing options may offer lower rates and fees, and may not charge loyalty tax, so it is worth considering them as part of your search for a better deal.
Case studies about loyalty tax
- Sally is a long-term customer of her bank, and has a home loan with them. She has been paying a higher interest rate than other customers, due to loyalty tax. Sally decides to shop around, and compares offers from different banks and institutions. She finds a better deal with a different bank, and negotiates with her current bank to match the offer. As a result, Sally is able to avoid loyalty tax, and save money on her home loan.
- John is a long-term customer of his bank, and has a mortgage with them. He notices that he is being charged higher fees due to loyalty tax, and decides to switch to a different bank. John compares offers from different banks and institutions, and finds a better deal with a different provider. He switches to the new bank, and avoids loyalty tax, saving money on his mortgage.
- Mary is a long-term customer of her bank, and has a personal loan with them. She notices that she is being charged higher rates due to loyalty tax, and decides to explore alternative financing options. Mary researches peer-to-peer lending, online lenders, and credit unions, and finds a better deal with an online lender. She switches to the online lender, and avoids loyalty tax, saving money on her personal loan.
Get the home loan interest rate you deserve
It’s important to stay ahead of the curve to ensure you can manage your cost of living efficiently and avoid paying unnecessary tax. It’s a good idea to review your home loan interest rates regularly as this can help reduce your monthly repayments.
See what competitive offers are available to you by creating your free home loan profile in just a few minutes. In some cases, Joust Live Auction users were able to reduce their home loan rate by as much as 1% on average.
*The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Joust recommends that you consider whether it is appropriate for your circumstances. Joust recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.
