RBA cuts rates, but are you still beating rate creep?

With the RBA cutting interest rates again this week – it’s an apt time to talk about lending.

I’ve been doing this for a long time. And if it’s one thing that I know – it’s that it’s everyone for themselves in the lending world.

So, what can you do to ensure you aren’t just another closed sale on your lender’s monthly KPIs?

Well, it’s a little complicated.

Banks are doing everything they can to repair their public image post-royal commission – and that’s great. It’s well overdue. But essentially, they are still a massive engine, and that engine still has to make profits.

And let me be clear – when I talk about banks, I’m not referring to the people you’ll generally come in contact with when you interact with a bank. The people on the coal face you’re speaking with – in my experience are, more often than not, genuinely trying to help you out.

In this instance, I’m referring to the power brokers, the people who set the bank’s agenda and strategy, and the marketing teams who continue to find ways to turn debt into happily ever after stories.

Millions are being poured into fancy marketing agencies to ensure you think the banks are now in your corner. But if there was any scenario that screams, ‘we say one thing, but do another,’ it’s that interest rates are still being ratcheted up for existing customers (aka rate creep) – even when the RBA slashes rates.

Rate Creep – Problem

I could almost guarantee you’re paying a higher rate if you’re an existing bank client than what’s on offer for new customers. This is a result of ‘rate creep,’ which is the effect of cheaper and cheaper rates being made available by banks via special offers and discounts to attract new business. At the same time, existing customers are kept with the status quo.

Let’s say the bank is offering a 5.00% interest rate, but to get new customers, they go to the market to show a more significant discount and 4.90%. This probably isn’t so much of an issue in small sample sizes. Still, over time, the deals get more powerful, and all of a sudden – you, as a loyal customer, are paying significantly more than a new customer to the bank.

Why is this the case?

Generally speaking, the standard excuse is a rise in funding costs or regulation, but in what world is it more expensive to manage your existing clients than it is to bring on a new one? The mind does boggle….

A few institutions out there don’t employ these tactics, but there would be a handful at max. Feel free to drop me a line if you want a tip about who they are.

Rate Creep – Solution

Ok, so now, how do we bypass the rate creep problem?

This part is simpler than you think.

Get your shit together and invest 15 minutes calling your bank and complaining about your interest rate.

Spend another 15 minutes doing some googling – find out what rates are on offer for their new customers, maybe even some competitors, and if you are really on a roll – ask your friends what their rate is.

Jump on the phone and get your lender to explain how they offer new customers a cheaper rate than you. If they don’t come to the party, be prepared to look at alternatives.

Until there is regulation around this, or public sentiment gets to the point where this kind of activity isn’t acceptable, the best thing you can do is put a reminder in your calendar every six months to call up and re-negotiate your rate.

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