Why you lose when you’re loyal

Loyalty, one of the best traits to have in a friend, is one of the worst you can have when you’re dealing with any kind of financial institution. Loyalty will mean you pay more than the next person, and don’t get anything extra for it.

When you sign up with a new insurer or bank, they’ll often give you special deals on products and services. This is often referred to as “new business pricing”, and in the banks eyes, it’s a necessary evil, or the cost of acquiring new business. While the great rate or deal you got makes you feel nice and loved when it first happens, it should really be viewed as more of a honeymoon period. Slowly, over time, you’ll realise that the awesome deal you got when you signed up, doesn’t seem to be as good as the deals other newer customers are getting. Even worse, you’ll see your bank advertising home loan rates that seem significantly cheaper than what they’ve got you paying.  

Unfortunately, this is the way banks have to make money, and they’re pretty good at it. The silver lining here is that in the opposite scenario, you’re with a bank which doesn’t know how to make money, and that is not an institution which you want to leave in charge of your finances.  

“Loyalty is dead”

Marc Benioff

Usually, the above process of getting a sweet deal, only to find it isn’t so sweet after a while, takes a few years to come to fruition. Lenders are notorious for slowly increasing your interest rate, so you don’t really notice unless you’re watching them like a hawk. What tends to most commonly occur is that someone will decide to check what their interest rate after about 5 years or so, realise that they’re paying far more than the next person, and jump on the phone to their lender right away. In other instances, people will often know that they’re being slightly jammed, but will feel that a phone call in which they’re asking for a cheaper rate would be seen as confrontational and aggressive.

The bad news is that this is exceptionally common. The vast majority of people either don’t realise that this is happening to them, or they’re worried about how they’ll be seen to be demanding something for less cost.  

However, the good news is that with this one phone call a year you can make sure you’re not paying a premium simply for being too lazy to pick up the phone. Once a year, you should call your bank, let them know of a few other figures you’ve seen elsewhere (you’ll have to actually have concrete figures to back you up), and get them to lower the rate they charge you according to these figures. A 5 minute phone call only once a year can end up being the difference between being on a competitive interest rate, or one which helps pad out the profits for the lender you bank with.

Better yet, find someone else to do it for you. If you can’t imagine any of your loyal mates doing your dirty work for you, get your loan through a mortgage broker and they’ll do it for you on an ongoing basis.

Mortgage brokers are paid on loan amount, not rate. Therefore, they don’t stand to gain anything by you getting a rate of 4% as compared to 3.5%. Brokers are well placed to understand what is a competitive rate, and what isn’t, and will be able to get your lender to periodically review your rate in order to make sure that you’re paying the lowest interest rate possible.

Loyalty is an inherently good trait to have, but make sure that it doesn’t come at a cost to you.