Why Do Banks Offer Better Rates to New Customers Than Loyal Ones?
If you’ve had your mortgage for a while, you may have noticed something frustrating. Your lender is offering lower rates to new customers, rates that are better than the one you’re currently on. This is known as the “loyalty tax,” and it’s more common than many realise.
Put simply, banks tend to reward new business and take existing customers for granted. It’s a pricing strategy that relies on inertia: the assumption that most borrowers won’t question their rate, even when better offers are out there.
What Is the Loyalty Tax?
The term refers to the difference between what new customers are offered, and what existing borrowers are actually paying. Over time, this gap can become significant.
The ACCC’s 2020 Home Loan Price Inquiry found that borrowers with loans more than three years old were paying around 0.40 to 0.50 percentage points more than new customers. For a loan of $600,000, that could mean paying an extra $2,400 to $3,000 per year in interest, just for staying put.
This happens because banks often quietly stop passing on their best discounts to existing customers. At the same time, they promote lower “headline” rates to bring in new business. The practice is entirely legal, but it’s not transparent. Many borrowers simply don’t realise they’re paying more than they need to.
Why Do Banks Do This?
The main reason is that it works. Most people don’t regularly check their rate, and even fewer actively negotiate. Switching lenders involves paperwork and effort, and many assume their bank will look after them.
The banks know this. They also know it’s cheaper to keep a current customer than to win a new one. But rather than reward that loyalty, they often allow your rate to drift higher relative to the market. Unless you push back, nothing changes.
This pricing approach also helps banks maintain their profit margins. Adjusting the rate on existing loans is a way to increase revenue without changing the rate they advertise to attract new customers.
Is It Allowed?
Yes. Lenders are free to offer different rates to different customers, even if their circumstances are the same. There’s no requirement for a bank to pass on rate cuts to everyone equally.
That said, the ACCC and the Reserve Bank have both raised concerns about the lack of transparency in how home loan pricing works. In 2020, the ACCC encouraged borrowers to compare their loan regularly and not assume they’re on the best deal. Since then, regulators have taken steps to improve visibility, such as requiring banks to publish data on their reference rates. But as of 2025, there’s no law preventing the loyalty tax. It’s still on borrowers to stay proactive.
How Big Is the Gap?
Based on recent reports:
- Borrowers with loans 3–5 years old paid, on average, 0.30% more than new borrowers
- Borrowers with loans over 10 years old paid up to 0.50% more
- The big four banks were estimated to collect over $4 billion annually from loyal customers paying higher rates
This gap can cost you thousands in avoidable interest each year, particularly if you have a larger loan balance.
Why Don’t Banks Automatically Adjust Your Rate?
Because they don’t have to. Unless you ask, they’ll often leave your rate as is, or let your discount slip over time. Banks may argue that some of the advertised rates are for limited-time offers or have different features, but the core issue remains: unless you act, you’ll likely be paying more.
A few lenders, such as Athena, promote the fact that they don’t charge new and existing customers different rates. But most lenders still follow the traditional model.
What Can You Do?
- Check your rate once a year.
Compare it to what your lender is offering new customers. Most banks publish this on their website. If your rate is higher, ask why. - Ask for a rate review.
Call your lender and ask them to match a competitor’s rate or reduce yours. Be prepared with examples. Many borrowers are surprised how quickly lenders move when they realise you’re serious about switching. - Refinance if needed.
If your lender won’t offer a fair rate, refinancing may put you in a better position. Even after accounting for any switching costs, a lower rate could save you thousands. - Consider lenders that treat all customers the same.
While still a minority, a few lenders now commit to offering the same rate to new and existing customers. This can help you avoid the loyalty tax in future.
Is Loyalty Ever Rewarded?
In home loans, not usually. You might get the occasional fee waived or a call from a relationship manager, but these small perks rarely outweigh the cost of a higher interest rate.
It’s not personal. It’s simply the way the system works. The more proactive you are, the better deal you’re likely to get.
The Bottom Line
Banks offer better rates to new customers because they have to. You’re already through the door, and most people don’t check their rate. That’s what they’re counting on.
But you don’t have to accept it.
If you want to avoid the loyalty tax, make it a habit to review your home loan regularly, ask for a better deal, and be ready to switch if needed. Staying loyal to your lender shouldn’t cost you thousands. If it does, it’s time to take back control.