Banks will usually offer higher interest rate discounts to new customers to win their business. But, of course, the banks never offer these higher discounts to existing customers, unless they ask for them.
Whilst this has always been the case, it is noteworthy that interest rate discounts have increased substantially over the past 10 years. This means the gap between what interest rates existing and new customers are being charged has also widened to the extent that it is becoming more important that you (or your mortgage broker) review your loans at least annually.
New customers are enjoying higher discounts
A decade ago, interest rate discounts (i.e., discount off the standard variable rate) typically ranged between 0.70% and 0.90% p.a. Today, we are obtaining discounts of up to 2.95% p.a.! This means it’s very likely that new customers are paying significantly lower interest rates than existing ones, particularly if they haven’t renegotiated their loans for a few years.
The chart below is compiled by the RBA and illustrates that new customers (orange line) are, on average, being charged lower variable interest rates than existing customers (purple line) – see yellow highlighted box. As you can see, this gap has widened considerably over recent years.
What drives home loan discounts?
Management remuneration packages (i.e., senior banking executives) tend to be linked to shareholder returns i.e., the share price. Bank share prices will be affected by factors such as (1) growth in mortgages compared to their peers and (2) net interest rate margin (which essentially is the gross profit generated by mortgage lending). A positive or negative change in these factors will tend to have an influence on a banks’ share price.
For a variety of reasons, banks can experience phases where they produce better results (i.e., high growth and margins) than their peers. Conversely, the reverse is true too. Therefore, when a bank underperforms, it must make up for lost growth and buy a greater share of the (mortgage) market. It does this through discounting, either through broad based promotions or more often, offering higher customer-specific discounts to win new business.
For example, in its recent half-yearly presentation in May 2022, Westpac confirmed that its investment mortgage loan book experienced a decline of 6.6% since September 2020 whereas its competitors, such as CBA, maintained its level of investor lending. Therefore, it is not surprising that Westpac is now offering higher interest rate discounts to win new investment loan customers.
All the banks ebb and flow between being more and less aggressive regarding pricing (discounting) which creates useful competition for proactive borrowers and mortgage brokers.
Automated re-pricing of mortgages
At ProSolution, we have recently implemented an artificial intelligence tool that periodically re-prices our clients’ mortgages. Using a range of data, it calculates what variable interest rates our clients should be paying and then automatically submits a request to their lender/bank to match that pricing.
With the growing popularity of fintech, I’m sure it won’t be long before similar tools to be available to consumers.
What to do if you don’t have a mortgage broker
It is advisable to proactively review your loans if your mortgage broker doesn’t do that on your behalf (or you don’t have a mortgage broker).
To do that, you must first research which lenders will offer you the highest discount. That will depend on many factors including your LVR, total lending, number of individual loans, whether you have any existing fixed rate loans, whether your repayments are structured as P&I or interest only, whether the loan is for a home or investment, the amount you have in offset accounts and so on. Pricing a loan isn’t always straightforward.
Once you are armed with those details (i.e., competitor offers), you must call your existing bank/lender and ask to speak to its ‘retention team’. Tell the ‘retention team’ that you have decided to refinance your loans. However, before you sign the discharge authority, you wanted to call them to see if there’s anything they can do (i.e., offer you a higher discount so that you don’t refinance). Using this script will ensure the lender knows that it will lose your business if it doesn’t match the discount.
If this doesn’t work and you believe that your rate is too high, then you should speak to a mortgage broker for a second opinion.
A lot of fixed rates are expiring soon
Many borrowers took advantage of the very low fixed rates offered by lenders throughout 2020 and 2021. Most of these fixed rate terms lasted for 2 to 3 years and will be expiring from 2023 onwards. As such, many borrowers will need to decide whether to rollover into another fixed rate or convert to variable. And if it’s a variable rate, they must ensure that the discount offered is favorable.
At this stage, I wouldn’t recommend another fixed rate (for the reasons discussed here), but of course fixed rates could fall over the coming months.
I expect that the banks will be very competitive to retain as many borrowers as possible. Again, you can use this intense competition to your advantage.
If you have a fixed rate loan that is maturing in the coming months and years, make sure you receive good credit advice.
You get what you tolerate
Periodically shopping around for better deals can save you a lot of money. This is particularly true for expenses like gas and electricity, general insurances and also mortgages. But it takes time and knowledge. Therefore, if you don’t have the time or energy to do this yourself, make sure you’re working with a team that will (proactively) do it for you.
 Discounts depend on many factors including your LVR, total lending, number of individual loans, whether you have any existing fixed rate loans, whether your repayments are structured as P&I or interest only, whether the loan is for a home or investment, the amount you have in offset accounts and so on. Pricing a loan isn’t always straightforward.