How to avoid paying the loyalty tax on your mortgage?
Introduction
Are you sure you are getting the best deal on your home loan? Many borrowers trust that their lender will reward their loyalty, but the reality is often very different. Long-term customers are frequently charged higher rates compared to new borrowers, a practice known as the "loyalty tax."
In this blog, we will explore what the loyalty tax means for you and how you can stay on top of your home loan to avoid paying more than you should.
Key takeaways
- Loyalty tax is the extra interest paid by staying with the same lender.
- Lenders offer better rates to attract new customers, not loyal ones.
- Even a 0.10 percent rate gap can cost big money over the loan term.
- Regularly reviewing your home loan can help you avoid loyalty tax.
What is a mortgage loyalty tax?
The mortgage loyalty tax refers to the extra interest that many homeowners pay simply for staying with the same lender over time. Although it's not a formal tax, it's a financial cost that comes from not regularly reviewing your home loan.
Lenders often reserve their best interest rates for new customers as a way to attract fresh business. Meanwhile, existing borrowers may find themselves at higher rates if they don’t actively seek out a better deal or negotiate with their lender.
This happens because many people either trust their current provider or find the idea of switching too complicated. As a result, they end up paying more than necessary just to be loyal. The loyalty tax serves as a reminder that when it comes to home loans, staying with the same lender isn't always in your financial best interest.
How much could the loyalty tax cost you?
Have you ever wondered how much extra you might be paying on your home loan just by staying loyal to your lender? We have run the numbers properly to show how much that loyalty tax could add up to based on different loan sizes and different rate gaps.
| Loan Amount (AUD) | Rate Difference | Extra Repayment per Month (AUD) | Extra Cost over 30 Years (AUD) | Extra Cost over 5 Years (AUD) |
|---|---|---|---|---|
| $300,000 | 0.50% | $125 | $45,000 | $7,500 |
| $500,000 | 0.50% | $208 | $75,000 | $12,500 |
| $1,000,000 | 0.50% | $417 | $150,000 | $25,500 |
Key Points:
The table assumes a 0.50% loyalty tax (rate gap).
Extra Repayment per Month = Loan × 0.50% ÷ 12
- Extra Cost over 30 Years = Loan × 0.50% × 30
- Extra Cost over 5 Years = Loan × 0.50% × 5
Tips to avoid loyalty tax on your mortgage
If you are an existing home loan customer, you have three practical options to steer clear of the loyalty tax:
- Ask your current lender for a better rate
- Refinance to a more competitive home loan
- Work with a mortgage broker for expert guidance and support
Let’s break down each option below to see how they can help you save money and secure a better home loan deal.
Ask for a rate reduction:
Avoiding the loyalty tax can be as simple as contacting your lender. If you have been with your bank for some time, it is worth calling and asking if they can match the rates currently offered to new customers. Highlight your history as a loyal client and request a review of your interest rate.
Many lenders are open to negotiating, particularly if you have a strong repayment record. Some even have dedicated teams specifically for handling rate review requests. Taking a few minutes to make the call can help you secure a more competitive rate and ensure you are not paying more than necessary.
Refinance if necessary:
If your current lender is not offering you a fair deal, it might be time to refinance. In February 2025, the Reserve Bank of Australia (RBA) cut the cash rate to 4.10 percent, marking the first reduction since 2020. Major banks quickly passed on the full 25 basis point cut to new customers.
However, many existing borrowers are missing out. Some lenders are choosing not to pass on lower rates to loyal customers, which means you could be paying more interest than necessary.
Did you know? Last year, borrowers paid an extra $6,000 in interest on average simply because they had not gotten around to switching. That is money better off in your pocket.
Refinancing now could still save you almost $10,000 in interest over the next two years if you switch to a rate under 6 percent. If you have a larger loan balance, particularly in cities like Sydney or Melbourne, your savings could be closer to $20,000. It is a good time to review your options and refinance if necessary.
Work with a mortgage broker:
Navigating the home loan market can be overwhelming, especially with constantly changing interest rates, loan features, and lenders offering different deals. Working with a mortgage broker ensures you are not paying a loyalty tax by staying with a lender who may not offer you the most competitive rate.
Mortgage brokers compare a wide range of lenders, recommend suitable options, and are legally required to act in your best interest.
It is no surprise that broker market share reached a record 76 percent in December 2024, as more Australians recognise the benefits of expert advice. A broker will help you review your existing loan, identify better opportunities in the market, and negotiate on your behalf. They ensure your home loan meets your needs, even as market conditions change.
Don’t let loyalty to your lender cost you more!
Contact ZedPlus today to review your home loan and explore options that may reduce your repayments.
Frequently Asked Questions on mortgage loyalty tax
Q. How often should I review my home loan to avoid the loyalty tax?
Ans: You should review your home loan at least once a year to avoid paying the loyalty tax. Additionally, whenever the Reserve Bank of Australia adjusts the cash rate, it's a good time to reassess your loan. By staying proactive and reviewing your loan periodically, you can make sure you're always getting the best possible rate.
Q. Can loyalty tax affect my loan term and cause a longer repayment period?
Ans: Yes, if your interest rate increases due to the loyalty tax, your loan repayments will increase, potentially making it harder to pay off your loan in the desired time frame. As a result, you may end up extending your repayment period or paying higher amounts in interest.
Q. Is it worth addressing loyalty tax if the impact seems small?
Ans: Even if the impact of loyalty tax seems small initially, addressing it can still lead to significant savings over time. The extra interest you pay may compound, and small amounts can add up, ultimately making your mortgage more expensive. A small effort now can save you more in the future.
Q. Will I have to pay fees if I refinance to avoid loyalty tax?
Ans: Refinancing usually involves a few standard fees, such as discharge and setup fees. But many lenders offer cashback promotions that cover or even exceed these costs.
At Zedplus, we break down all costs for you upfront and show you your net savings over time. We won’t recommend switching unless you’re better off financially. Transparency is key, and Zedplus ensures you know exactly what to expect, making your decision clear and confident.
Q. What if I am not eligible to refinance my home loan right now?
Ans: If you are not eligible to refinance your home loan at the moment, there are still steps you can take to improve your financial position. Focus on building your credit score, reducing debts, increasing your home equity, and maintaining a consistent repayment history
Being declined by one lender does not mean you are out of options. At Zedplus, our network includes lenders who specialise in flexible lending solutions. They are open to different types of income, a range of credit histories, and customised loan structures that may better suit your situation.
We will also guide you on strengthening your position so that when the time is right, you are ready to refinance confidently.
Q. Are there any government regulations regarding loyalty tax?
Ans: Currently, there are no specific regulations regarding loyalty tax. However, Australian lenders are required to provide clear and transparent information about loan terms. If you believe you're being unfairly charged higher rates, you can file a complaint with the relevant authorities or seek financial advice to address the issue.
Final thoughts
By implementing these strategies, you are not just avoiding the loyalty tax, you are making smarter moves to secure a better financial future.
At Zedplus, we are committed to helping you find the right solution, whether negotiating a better rate with your current lender or refinancing to a more competitive home loan.
Our team takes the time to understand your needs and recommend options that truly work in your favour. Contact us today for a complimentary loan review and take the first step toward greater savings and long-term financial confidence.
