It has been stated in the Australian Competition and Consumer Commission (ACCC) Home Loan Price Inquiry interim report that the big four banks of Australia have made it “unnecessarily difficult and more costly” for Australians to find the cheapest home loan rates.
According to the report, which focuses on the findings about the pricing of the big four banks home loans during the period 1 January 2019 to 31 October 2019 (the price monitoring period) , the headline advertised interest rate does not accurately reflect the interest rate most big four bank customers actually paid for their home loans because close to 90% of customers received discounts.
The ACCC interim report found an average gap of 123 to 131 basis points – depending on the bank – between the average owner occupier rate and the variable headline rate.
News: ACCC commences pricing transparency inquiry for home loans https://t.co/PrdVPx5s3i— ACCC (@acccgovau) October 13, 2019
Related: Banks welcome ACCC investigation
ACCC chairman Rod Sims blamed a lack of transparency in home loan pricing practices for making it hard for borrowers to compare home loans.
“Given the economic disruption, uncertainty and job losses stemming from the COVID-19 pandemic, many consumers may not be inclined to shop around and ask for discounts from their banks right now,” Mr Sims said.
“However, our analysis shows how that even a small further reduction in interest rates could potentially save thousands of dollars over the life of a mortgage.”
“Consumers should consider this carefully when it is time to re-engage with their lender.”
The inquiry from the ACCC also discovered that “maintaining profitability was a key consideration” of the four major banks when considering if and when to pass on Reserve Bank cash rate cuts to their customers.
According to ACCC Chair, Rod Sims, the big banks have been trying to “shore up” their profitability, but in a low rate environment where their savings account rates have moved close to zero, that has meant not always passing on cuts to borrowers in full.
“It was their strong preference, after the RBA’s cuts, not to further reduce the rates customers were earning on some deposit products as they approached 0%,” he said in a statement released last week.
At its meeting today, the Board decided to maintain the current policy settings, including the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points – https://t.co/oolm6sKPfu— RBA (@RBAInfo) May 5, 2020
“The banks’ reluctance to cut these deposit rates led them to anticipate lower profits, which they aimed to recover by not always fully passing through cash rate cuts to their mortgage customers.”
Also, the watchdog singled out Commonwealth Bank for “consistently having a significantly longer lag period than the other big four banks.”
In April, the Reserve Bank left the cash rate unchanged at a record-low 0.25%. Rod Sims, ACCC Chairman, told Guardian Australia the delay in rate cuts coming into effect “certainly helps the revenue” of the banks.
Sims said the banks’ focus on maintaining profitability of their home loans was largely due to the plummeting interest rates their customers were earning on deposit products.
Reluctant to cut their deposit return rates as interest rates neared zero, Sims said the banks anticipated lower profits “which they aimed to recover by not always fully passing through cash rate cuts to their mortgage customers.”
However, Sims said the cost for banks to fund their loans over 2018 and 2019 “came down more than the rates of mortgages,” reductions he believes could have funded further discounts for mortgage customers.
The ACCC’s Home Loan price Inquiry interim report also calculated that borrowers with a loan over five years old were paying an average of 40 basis points above what new customers with new loans were paying.
.@accc interim report on mortgage pricing— Gemma Felicity Acton (@GemmaActon) April 27, 2020
*90% of Big 4 home loan customers get a discount (average discount about 1.25%)
*Existing customers are paying about 0.4% more than new
Key takeaway->ALWAYS shop around, REVIEW what you’re paying every few months & ASK for a discount! pic.twitter.com/PGcYORoVaw
This finding with the interim report was that loyalty can cost existing customers. The big four banks focus on attracting new home loan customers by advertising increasingly large discounts over time has created a difference between the average interest rates paid for new loans compared to existing loans.
The calculation in the report found that for a loan size of $200,000, a customer could have saved $850 in interest repayments in the first year if they had refinanced to obtain a new loan rate. Hence, the report urged borrowers to ask for a better rate.
The report found that (as of September 2019), new customers had a home loan with a rate 26 basis points lower on average than customers with an existing home loan.
“Even a small reduction in interest rates can potentially save a consumer thousands of dollars over the life of their loan,” the report said.
“Customers with existing home loans should review their loan on a regular basis and ask their lender for a better deal.”
“Some customers with an existing loan may need to switch to another home loan product with their lender, or switch to another lender, to get the best deal available to them.”
CDR exemption imposed by ACCC
The ACCC has granted three-month exemptions to financial services providers that are required to share product reference data by 1 July 2020, due to the impact of the coronavirus pandemic.
The temporary exemptions under the Consumer Data Right (CDR), until 1 October 2020, will apply to non-major authorised deposit-taking institutions (ADI), including non-major banks, building societies and credit unions.
Commenting on the exemptions provided to financial services providers, ACCC commissioner Sarah Court said: “The ACCC is granting these exemptions as an acknowledgement of the intense resource requirements of the industry as a result of the COVID-19 pandemic, and in particular non-major banks that may not be able to prioritise this at this time.”
“We understand that financial providers are dedicating many resources at present to support their customers. However, we do encourage providers to share product reference information on a voluntary basis if they are in a position to do so.”
The ACCC introduced the framework governing the CDR earlier this year in February, and it includes rules around sharing of interest rates, fees and charges and eligibility criteria for banking products.
Related: Open banking delayed ’til July 2020
The revised draft also proposes:
- Clarifications on the types of accounts in scope for sharing consumer data
- New rules on the function of the accreditation register and registrar
- Rules relating to the use of the CDR logo
- Withdrawal of consent to collect and use data and notification
- Interested parties have until 8 May to provide submissions in response to this consultation
- The proposed amendments following this consultation will come into effect from July 2020.
Basis points – a unit of measure for interest rates. 1 basis point equals 0.01%.
Words by Ece Demir
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