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Why do banks offer lower rates for new customers?

Why do banks offer lower rates for new customers?

Why do banks offer lower rates for new customers?

Did you know that banks will tend to offer cheaper interest rates for new customers than they do for established customers? It might seem counterintuitive to not reward customers for their loyalty, but there is a certain amount of nuance behind why this is the case.

So, does that mean you should move to a new bank in pursuit of a cheaper rate? Or should you look at ways to hack the system? Here’s what you need to know. 

Why do banks have higher rates for existing customers?

Discounted interest rates serve as a drawcard for new customers in order to get them through the door. These low rates are generally designed to be attractive at the time and are based on a set discount off the banks standard variable rate (SVR). At the time of writing this article CBA’s SVR is 4.55% for home owners with a principle and interest loan. 

There are a few reasons why your rate can become uncompetitive over time: 

  • Banks offer larger discounts off their SVR to new clients. For example, the current discount off SVR for a homeowner with a principle and interest mortgage through CBA is 2.07% and 12 months ago the discount off SVR was 1.80%
  • Cuts made by the Reserve Bank of Australia (RBA) to their base rate are not fully passed on by the lenders i.e. the RBA might make a 0.25% cut to their base rate, but the banks only reduce their SVR by 0.20% 
  • Lenders make increases to their SVR rates due to changing market conditions i.e. their internal costs have risen and they need to increase their margins 
  • Your fixed rate has expired and you’re now on the banks SVR 
  • Over time people often become complacent or busy and forget to compare their interest rate to the rates being offered to new customers. Banks rely on this as it allows them to carve out more profitability 

What are your options?

So, keeping this in mind, what are your options for getting a better rate? 

  • Refinance. If you’re not happy with your bank and your rate, it might be a good time to refinance and partner with a new lender to attract that promotional rate. These days this process is far easier than it used to be
  • Negotiate with your bank. Your broker can work on your behalf to negotiate a better rate with your existing bank. The bargaining chip may be that you will depart for another bank unless they come to the table

Cashback and rebate incentives

Aside from accessing a cheaper rate and paying less in repayments each month, many banks and lenders are now offering cashback or rebate deals to incentivise new clients. According to Mozo, over 20 different banks and lenders are offering incentives to new borrowers up to $3,000 or more. 

It’s important before going down this path that you weigh up your priorities. What are your long term borrowing objectives? Do you have the right structures in place? Can your rate be renegotiated with your current lender or would you be better suited making a move to a different bank?

Want to discuss your options for securing the best interest rate? Speak to the team at Orium Finance today.

Speak to our team today to see how you can achieve your financial goals.

One of our mortgage brokers will contact you to discuss the following:

  • Get to know your financial objectives
  • Help you to understand your borrowing capacity
  • Take you through how we can assist you with your finances

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