Are you paying through the nose on your home loan?
You could be paying thousands of dollars a year on Bank Loyalty!
Eighty percent of the Australians bank with the four-big banks.
We chose our banks and stay with them as loyal customers. Research, however, shows that being disloyal actually helps to save money.
If you shop and switch often especially outside the big four you may save money on mortgage interest.
Staying vs Switching - Costs
On the average, customers stay with their bank for a decade, research shows. 80% of the Australians have many products with their banks and around 50% use one provider for all their banking.
Abraham Tang, director of Abraham Finance says:
“Australians are loyal banking customers. However, this loyalty means we are losing out on serious savings – in some cases, thousands of dollars a year,”
He discovered that a proper choice of better value primary bank could save a customer as much as $1600 every year. If you are bunching all your financial products with one bank, you should look around for a bank that offers value on many financial products.
Psychological Barriers to Change
Hesitation to consider other options has powerful psychological reasons.
Eighty-five per cent of Australians say they worry about their financial futures. Yet 67% procrastinate when they should be making financial decisions as revealed by the Suncorp Cost of Procrastination Report. This is because our brain is wired that way according to Phil Slade behaviour economist of Suncorp.
Slade asserted that:
“The simple act of looking at our finances conjures a variety of feelings – confusion, disappointment and even fear of the future. As our brains are hardwired to avoid pain, we become naturally resistant to any money-related tasks.”
This instinct of pain avoidance makes us stay with the bank we’re currently with, in spite of the fact that we see advertisements of bank fees or interest rates lower than we pay on our mortgage and know that substantial savings are possible by switching banks.
Power of Comfort Zone
A big market share has been captured by the big four (CBA, Westpac, ANZ and NAB) with almost 80% of Australians banking with them.
According to Abraham “A lot of this comes down to convenience. It’s fair to say there is also a degree of lethargy involved as well, with many Aussies feeling that it’s too hard to switch banks. However, our love of convenient banking and propensity to stay put rather than seek out better value alternatives is costing us big time.”
He goes on to say smaller banks, credit unions, and non bank lenders may be better alternatives to the big four banks at times.
Abraham says that according to a research they are better than the big banks in customer satisfaction, service and trust.
“These alternatives often have lower overheads compared to the Big Four banks, allowing them to pass on cheaper interest rates to customers. Locking in half a per cent or even one percent less with another bank could add up to tens of thousands of dollars in cost savings over loan term.”
Making the Switch Simple
You should review your home and investment loans at least once every 2-3 years to ensure you’re getting the best possible and the lowest cost deal as suggested by Abraham.
This seems a difficult task but this has been made easy by the rise of Abraham Finance who have made this a relatively simple exercise. Borrowers can compare home loans from many providers at one place.You can compare multiple lenders and products with ease.
As a result, you can use this information to get a better deal with your bank.
However, if you do make up your mind to switch banks, it is a quite simple, hassle free process. Abraham Finance will handle paperwork for you though you need to supply documents including a driver’s licence, payslips and statements of current financial commitments. They will deal with lenders on your behalf to go through money saving exercise.
Abraham says “With competition between banks rife at the moment, many have generous sign up perks for new customers including fee waivers, cashback, bonus rewards card points and introductory rates.”
84% of $1.3 Trillion mortgage in Australia was shared by Major Banks and Macquarie.
Chairman of Australian Competition and Consumer Commission (ACCC), Rod Sims, shared the same concern. On the third day of Royal Commission into Australian Banking in 2018, he asserted that “Being loyal to your bank, I am afraid, is often costing you money… you should be shopping around each year.”
Refinancing - Caution
Despite the benefits of refinancing, Abraham cautioned that it may not be suitable for everyone. He pointed out that if you have a fixed mortgage rate there may be a break cost involved in switching from your current provider.
There may be penalties for premature termination of loan. There may also be loan establishment, discharge fee, other fees or limit on the number of offset accounts you can use in dealing with the new lender. The low headline mortgage rate should not be the only consideration you take. All costs need to be weighted up when making your decision.
It is advisable to understand the home loan payment implication and also the features of the new account you want to sign up for. Take this into your calculations when taking a decision for switching to the new provider.
Scott Morrison, Leigh Sales and Refinancing
Even the Australian Prime Minister Scott Morrison advised people to review their home loans and shop for a better deal when dealing with banks.
Mr Morrison asked Westpac to explain why they increased interest rates outside of Reserve Bank decision when speaking to reporters recently.
He stated:
“They have to justify, in this environment when people are really feeling it, why they believe they need to clip that ticket a little harder when people in Australia and their customers I think are doing it tough,”.
He further stated:
“So that’s for Westpac to explain, not for me, that’s their decision, and others will make their own decisions, but if you don’t like what Westpac’s done, go to another bank, because competition is the key to a more competitive and a stronger and more accountable banking system.
“They can make those decisions but they’re accountable for those decisions, and I think customers will make up their own minds as they should.”
Westpac chief executive Brian Hartzer was asked by ABC 7.30 host Leigh Sales why the bank couldn’t absorb the costs out of its $4.2 billion profit.
She asked “An ordinary household has to work within their budget to pay the extra money on their mortgage yet one of the wealthiest institutions can’t do the same?”
The bank had borne the cost for the past six months, Mr Hartzer replied, hoping it would reduce but “we sadly had to conclude this is a more permanent change or certainly it is going to persist for a little while”. Mr Hartzer said that though the profits had gone up by six percent, margins were “significantly impacted” as costs began to go up in February.
He went on to say “Part of my job sometimes is to make difficult decisions that are about the long-term sustainability of our business and that involves addressing increases in funding costs.”
Abraham, director of Abraham Finance, stated “While banks are entitled to make a profit, some Westpac home loan customers will be disappointed with the bank’s decision to increase their interest rate.” He also added that the customers having loan of $500,000 will have to pay an additional $43 a month or $516 a year. For a customer with a $1 million loan it will be an extra $87 a month or $1044 a year.
“Most households will be able to absorb the rate hike, but the one who struggles for the increase will feel burdened by the extra cost.
“Now that Westpac has hiked, taking the brunt of the bad PR, we expect the other three banks to follow suit. If your lender hikes your interest rate, it’s the perfect time to start considering your options.”
Your Opportunity to Save
The customers who have been loyal and have always paid the mortgage repayment on time, have still need to bear on average, a cost of over a thousand dollars each year for their loyalty. Banks are going to extreme lengths to lure new customers at the expense of existing ones and so the loyal bank customers missing out on better mortgage deals.
According to Abraham Finance last week there was reduction in new lending of 1.6 percent compared to the previous month. Banks are making a desperate bid to get new customers by releasing as many as 127 new products for them.
Abraham stated that loyal customers are getting a raw deal. He went on to say “There are so many new products on our marketplace specifically marketed at new customers. And guess what? They’ve got low interest rates attached that you’re probably not getting.”
He further said that new customer rates in the market are being offered by three of the big four – ANZ, Commonwealth and NAB. Westpac’s subsidiaries St George, Bank SA and Bank of Melbourne are offering discounts up to 19 basis points. Lenders have increased the rates for existing customers saying that the cost of funding has gone up. New customer rates have been introduced by six of the 10 biggest lenders by market share.
Abraham Finance believes that based on a $400,000 home loan settled in August 2018 compared with August 2017, existing customers could be paying up to 48 basis points more which comes to $1,320 per year more than new customers of NAB Base Variable Rate Home Loan (Principal and Interest)
Based on a $400,000 home loan settled in August 2018 compared with August 2017, in case of ANZ Simplicity Plus (Principal and Interest), existing customers could be paying up to 34 basis points more than the new customers, which comes to $924 per year.
Abraham Finance’s views are similar to those of the Productivity Commission that the existing customers pay 0.3 to 0.4 percentage points or up to $ 1,044 a year on the average home loan balance.
Existing borrowers were found to be charged an average of 32 basis points by some of the biggest lenders like ANZ, CBA, Macquarie Bank, NAB and Westpac according to ACCC.
Abraham recommends that you check the rate you are paying and find out the rate your bank is giving to new customers for the same product to know if you are being taken for a ride for your loyalty. Don’t be afraid to switch if your bank refuses to give you a better rate. Abraham Finance empowers you to save on your hard-earned money. For more information, feel free to talk to Abraham on 0403 154 690 or email abraham@abrahamfinance.com.au