The 'loyalty tax': Why staying with your current lender may cost you thousands
New research suggests that 87 per cent of borrowers paid above the best available mortgage rates in 2025, highlighting the financial risk of relying on convenience over competitive comparison.
A financial analysis published by Yahoo Finance examines the strategic implications of refinancing a mortgage with an existing lender versus seeking offers from competitors. The report highlights a phenomenon known as the "loyalty tax," where retention offers from current lenders are calibrated against the borrower’s existing rate rather than the current market rate. This approach often results in less competitive pricing, leaving borrowers with higher costs than they might incur by shopping around.
According to Bankrate’s "Hidden Homeownership Tax" research, 87 per cent of borrowers in 2025 paid higher than the best available mortgage rate for their credit profile. This lack of comparison shopping resulted in an average annual overpayment of $3,343. A separate finding from the same research indicates that 79 per cent of refinance borrowers in 2025 paid more than the best rate available for their profile, leading to an average loss of $2,462 per year in avoidable costs.
The convenience of staying with a current lender, such as account consolidation and familiar payment processes, often masks the potential financial downside. While a retention offer may appear to be an improvement over the borrower's current rate, it is not necessarily the most competitive option available. For instance, a borrower with a $300,000 balance at 7.75 per cent might receive a retention offer of 7.15 per cent. However, this rate remains higher than the cited market average of 6.78 per cent for a 30-year refinance, meaning the borrower leaves substantial money on the table by not seeking outside quotes.
Experts advise that the only way to determine if a current lender's offer is competitive is to compare it against outside quotes. The Consumer Financial Protection Bureau recommends contacting multiple lenders to compare rates, fees, and loan terms. By obtaining quotes from at least three lenders, borrowers can secure better interest rates and negotiate lower closing costs. Lenders are often more willing to match or beat competing offers once a borrower presents an outside quote, as they are incentivised to preserve the servicing relationship.
Refinancing closing costs typically range from 2 per cent to 5 per cent of the new loan amount, regardless of whether the borrower stays with the same lender or switches. While some lenders may negotiate or waive fees to retain business, this is generally only offered when a competing proposal is presented. Borrowers should review the Loan Estimate provided by lenders, which lists the rate, fees, and closing costs, to ensure they are not overpaying.
Regarding credit scores, multiple mortgage inquiries made within a 45-day window are treated as a single inquiry by credit scoring models. This means that shopping around for the best rate does not negatively impact a borrower's credit score. Given that the Federal Reserve’s rate hikes between 2022 and 2025 led to peak interest rates, borrowers who locked in rates during this period are particularly well-positioned to benefit from refinancing if they take the time to compare their options.
