Refinancing among mortgage holders is expected to gather pace from here on in, predicts Loan Market chief executive David McQueen
Say goodbye to the “lender loyalty tax” if, as is widely expected, the Reserve Bank of Australia (RBA) decides to implement the second interest rate cut of 2025 on Tuesday.
“Customers have been shopping around for better outcomes and this will only increase after the RBA meeting,” said David McQueen (pictured), chief executive of brokerage Loan Market.
Loan Market has already reported a 63% jump in refinancing activity in March – a direct response to the RBA’s earlier 25-basis-point rate cut.
That surge carried through into April, with refinancing volumes sitting 40% higher than the same time last year. According to McQueen, the only way is up even more.
“Borrowers are fed up with paying the lender loyalty tax. They know there is plenty of competition out there and aren’t afraid to shop around for a lower rate,” he said.
This loyalty tax refers to the common industry practice of offering lower rates to new customers while leaving existing borrowers on higher rates. It can lead to customer churn as their brokers guide them to better deals.
“History shows us that many lenders don’t always pass on the full cut, and even those that do may not offer their most competitive rate to existing customers,” said McQueen.
While most big lenders opted to immediately pass through February’s 25-basis-point cut, all eyes are on whether they’ll follow through with further cuts after today.
Potential savings are significant
If the RBA cuts the cash rate again by 25 basis points, bringing total year-to-date reductions to 50 basis points, the savings potential could be nothing to sniff at.
McQueen shared the example of a borrower with a $750,000 loan on a 30-year term. At a starting rate of 6% per year, a 50-basis-point reduction would see their rate fall to 5.5%.
That drop alone would deliver more than $3,500 in interest savings in the first year if the borrower is making fortnightly repayments, McQueen said. If that same borrower refinanced to the lower rate but kept their repayments the same, they could save more than $170,000 in interest over the life of the loan.
“So, if a borrower has had a loan for a few years, now would be the perfect time to check with a broker they’re getting a competitive interest rate,” he said.
He added that competitive rates aren’t just for those refinancing. “While lower rates reduce borrowing costs, this is still a time for smart decision-making.
“Buyers should speak to their broker to ensure they’re structuring their loan to suit their situation, and not just chasing a number. This could mean borrowers looking at ways to get the most out of their mortgage by using an offset account effectively.
“Even a small amount of extra savings to offset their account can reduce interest and help them pay down their loan faster.”
Five tips for when rates drop
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Keep your repayments steady: If your lender lowers your minimum repayment, McQueen suggested trying to continue paying the higher, original amount. This will help you repay the loan faster and reduce the total interest paid over time. New Commonwealth Bank data suggests that many borrowers at the Big Four bank have been employing this tactic
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Review and renegotiate your rate: Not all lenders pass on the full rate cut, and some act more slowly than others. “Now is the time to compare your rate, negotiate with your bank, or refinance if a better deal is available,” said McQueen
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Make the most of an offset account: If your mortgage includes an offset account, depositing extra funds into it can lower the interest charged each month
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Think twice: If you come into extra money (like a bonus or tax refund), think about putting it toward your home loan to save on interest and shorten the loan term. McQueen said: “Just because if something happens and interest rates don’t dip down as low as expected, some people could be better off by fixing sooner.”
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Consult a mortgage broker: A broker can compare a range of lenders to find competitive rates, assist with refinancing, and help structure your loan to best suit your needs
With the refinancing wave already building and another rate cut highly likely today, “brokers have a critical role in helping borrowers get a better deal, reduce interest, and make smarter financial choices,” McQueen said.
