The Inflation Tax · Part 2
Locked-In Profits
Do banks profit from rate rises? Where the advantage really comes from, how long it lasts, and why loyal customers pay the most.
Opinion and general information only, not financial advice. Scott, Charlene, Madge, FMA and SBA are fictional.
Charlene opens the banking app
Scott and Charlene live on Ramsay Avenue in Modbury with two kids and their dog, Bouncer. Their $500,000 home loan is with Fat Margin Australia (FMA).
When the Reserve Bank of Australia (RBA) lifted the cash rate by a full 1% across 2026, FMA passed each rise on within about two weeks (The $300 Question).
One Sunday night, Charlene opens the FMA app to see where the money is going. Three things jump out:
- Their everyday account, holding the kids' savings and the grocery money, still pays almost nothing.
- Their online saver went up, but by less than their loan did, and weeks later.
- On FMA's homepage, a banner offers new customers a home loan rate lower than the one she and Scott pay.
She turns to Scott: "Hang on. They charge us more straight away, pay us less, and give strangers a better deal. How is that allowed?"
The short answer
Rate rises hand banks a head start, but it fades. The advantage that lasts is loyalty: existing borrowers often pay more than new ones, simply because they don't ask. It's legal, and it's the part you can fight.
In Part 1 we showed the gap between how fast loan rates and savings rates move. Here's where that advantage comes from, how long it lasts, and the bigger one hiding in plain sight.
1. The head start, and why it fades
A bank's cost of money is an average. It blends the interest it pays on every deposit and every loan it takes from investors. When rates rise, some parts of that blend move slowly.
Cheap deposits. Scott and Charlene keep about $20,000 in their everyday account. It pays them around $2 a year. When the RBA lifts rates, that money stays almost free to FMA, so FMA's average cost of money rises more slowly than the cash rate. This is common: when rates were rising in 2023, the RBA noted banks paid no interest on around 15% of at-call balances. The ACCC called deposit rate rises "lower, slower, conditional or temporary" (Small Caps, Feb 2023).
Locked-in costs. Across the road lives Madge, a retiree. Last January she put $100,000 into a 12-month FMA term deposit. Her rate is fixed until it matures, so four RBA rises later FMA still pays her the old rate. FMA's fixed-rate borrowing from investors works the same way.
Why it fades. Madge's deposit will mature and be repriced at today's rates. Savers can move their cash. Banks also use hedging, contracts that smooth out rate moves, which shrinks both the windfall and the risk. So the head start is real but temporary. Every new rate rise simply restarts the clock.
2. The loyalty tax: the advantage that doesn't fade
Remember the banner offering new customers a cheaper rate than Scott and Charlene pay? That isn't about funding costs at all. FMA's money costs the same whether it lends to a new customer or an old one. The difference is pricing power.
Bankers have a name for it. New customers are the "front book", and banks compete hard for them with sharp rates. Existing customers are the "back book". Once you're in, the discounts quietly stop.
The competition regulator measured it. When the ACCC finished its home loan inquiry in December 2020, it found that borrowers with loans three to five years old paid about 0.58% more than the average new loan. Loans older than 10 years paid about 1.04% more. The older the loan, the bigger the gap (ACCC, 5 Dec 2020).
| If Scott and Charlene's loan were… | Extra paid vs a new customer | On their $500,000 loan |
|---|---|---|
| 3 to 5 years old | about 0.58% | about $2,900 a year |
| Over 10 years old | about 1.04% | about $5,200 a year |
Based on ACCC averages from September 2020; today's gaps may differ.
Why do people pay it? The ACCC named the reasons: pricing that's hard to compare, the time and hassle of switching, and lenders with little reason to make leaving easy. Banks are betting that busy families like Scott and Charlene, juggling work, kids and Bouncer, won't find a spare afternoon to haggle.
Here's the key difference. The head start from rate rises fades as deposits reprice. The loyalty tax grows the longer you stay.
3. To be fair to the banks
None of this proves that every bank profits from every rate rise. Big-bank margins stayed roughly flat across 2026, and banks point to rising bad debts and the cost of hedging (Motley Fool, Sep 2026). The head start is real, but it's temporary and partly offset.
That's why it helps to separate two questions:
- Who pays to fight inflation? That's about the RBA's tool, and it lands hardest on mortgage holders.
- Who benefits from how banks respond? That's about pricing, and the clearest, longest-lasting evidence points to the loyalty tax.
You don't have to believe banks are villains to see the problem. You only have to notice that, in the middle of a national squeeze, the customers who stay put are paying the most.
What Scott and Charlene can do this week
The loyalty tax is the one part of this story borrowers can push back on. A 20-minute rate review:
- Find your rate. Check your app or latest statement for your exact interest rate.
- Find the new-customer rate. Look up what FMA advertises to new borrowers for the same loan type.
- Check one or two rivals. See what others offer. Even Skim Bank Australia (SBA) may beat FMA for a new customer.
- Call and ask. Quote the lower rate and ask FMA to match it. Ask for the retention team if the first answer is no.
- Be ready to switch. If they won't move, weigh switching costs against the yearly saving.
- Put idle cash to work. An offset account or high-interest saver stops your spare cash being free money for the bank.
Individual haggling won't fix the system, though. The RBA asks mortgage holders to carry the fight against inflation, and banks quietly charge their most loyal customers the most. If the cost of cooling the economy lands on families, why should loyalty be what costs them extra?
This article is general information and the author's opinion. It doesn't consider your personal circumstances. The author is not a licensed financial adviser. Before making financial decisions, speak with a licensed professional. Figures are illustrative.