What is a home loan loyalty tax and am I paying it?

4 minutes

You would think that you should get rewarded for sticking by your lender, but unfortunately, you’d be wrong. Recent research from the ACCC has found that these loyal borrowers are actually paying considerably more. This is often referred to as a “loyalty tax” across the industry. 

What is loyalty tax? 

The phrase loyalty tax refers to the higher home loan interest rates paid by existing customers of lenders compared to those paid by their new customers.  

This interest rate gap exists because lenders need to offer competitive rates to attract new customers, but rely on their existing customers staying put, regardless of their rate. Banks may reduce or change interest rates for new customers, but existing home loan customers are often paying a higher interest rate than new customers. 

This arrangement works well for the banks, as it means they are keeping their most long-standing customers for years on higher interest rates and fatter profit margins. It is this lack of transparency and financial unfairness that Nano is on a mission to change, as we believe that customers should not be penalised for their loyalty. That is why, at Nano, new and existing customers both get our best rate. 

How much could loyalty tax be costing me? 

According to the ACCC’s 2019 report on loyalty taxes, customers that have been with the same lender for a longer period of time pay interest rates on their home loan that are higher than the market average by the following amounts: 

  • 1-3 years with current lender = 0.42% higher 
  • 3-5 years with current lender = 0.58% higher 
  • 5-10 years with current lender = 0.71% higher 
  • 10 years or more with current lender = 1.04% higher 

As an example, let’s say you’ve been with your current lender for 5-10 years and are paying a rate that’s 0.71% higher than the market average on a $500,000 home loan.  

According to the ACCC’s data you could be charged an extra $2,016 in interest per year compared to a new borrower paying the current market interest rate.* 

Over the course of a 30 year loan term, that seemingly small 0.71% could equate to an extra $60,480. 

Why are we putting up with this? 

Traditional lenders have been getting away with charging a loyalty tax for one simple reason. Switching to a new lender for a better rate often requires pages of paperwork, hours of time and weeks spent waiting for an outcome. The mortgage process is often difficult and confusing, but it needn’t be.  

With new digital lenders, such as Nano in the market making the refinancing process simple and fast, there is no reason to be penalised with a loyalty tax. Calculate how much you can save on your home loan by refinancing to Nano here.  

How do I know if I’m paying a loyalty tax?  

First thing to do is check your current rate, and compare this with the market advertised rate. If the rates don’t match and there is a difference, then you may be charged a loyalty tax. If it’s been a while since you’ve heard from your bank about a change in interest rates on your mortgage, or any mention of a reduction, then you may be paying a loyalty tax on your home loan. 

Am I still paying a loyalty tax if I’m on a variable rate mortgage? 

Even with variable rate mortgages, where your interest rates change periodically, you may still find that the variable rate for your home loan is higher than the market advertised rate for new customers, or differ from the comparison rate. So whilst you may feel you have a good deal, you could still be getting stung with a mortgage loyalty tax! 

What should you do next?  

Put your lender on notice – call and ask for a better rate. Know what you can get and if they won’t help you, vote with your feet and move.  

Otherwise, consider switching to a lender that doesn’t penalise customers for being loyal. At Nano, new and existing customers will both get our best rate, no questions asked. If we drop our interest rate for new customers, we drop it for our existing customers too. Avoid paying too much in interest payments with your current home loan and enjoy the savings! 

It’s time to make a smart money move. Refinance your home loan with Nano.



1. ACCC, November 2020, Home Loan Price Inquiry, https://www.accc.gov.au/focus-areas/inquiries-finalised/home-loan-price-inquiry/final-report 

* Assuming a 30 year loan term.