A new report from the Australian Competition and Consumer Commission (ACCC) lays bare how the opaque pricing of discounts offered on residential mortgage rates makes it difficult for customers to make informed choices. The practice also disadvantages borrowers who do not regularly review their lending choices.
The ACCC’s interim report, released this month, is monitoring the prices charged by the Big Four and Macquarie Bank, who’ve been impacted by the federal government’s $6.2bn bank levy. The report has identified signs of less-than-vigorous price competition, especially among the Big Four.
“We do not often see the Big Four banks vying to offer borrowers the lowest interest rates. Their pricing behaviour seems more accommodating and consistent with maintaining current positions,” said Rod Sims, Chairman of the ACCC. “We have seen various references to not wanting to ‘lead the market down’, to have rates that are ‘mid-ranked’ and to ‘maintain orderly market conduct’.”
Discounts play a major factor in the interest rates customers are paying. Banks offer varying levels of discounts, both advertised and discretionary, but the latter isn’t always transparent to consumers.
The five banks under review determine discretionary discounts against a range of criteria, including the borrower’s risk profile, the geographic location of the borrower or their residential property, the borrower’s value (or potential value to the bank), and the bank’s desire to write new business.
“A borrower’s ability to negotiate has also been an important factor in what, if any, discount they receive,” the interim report said.
During the two years to June 2017, the average discount across the five banks under review on variable interest rate loans was 78 to 139 basis points off the relevant headline interest rate.
“The discounting by the big banks lacks transparency and it’s almost impossible for customers to obtain accurate interest rate comparisons without investing a great deal of time and effort. But the potential savings from these discounts are immense,” Sims said.
The report found that the average interest rates paid for basic or “no frills” loans are often higher than the average interest rates for standard loans at the same bank,
“We think many customers who opted for ‘basic’ or ‘no frills’ loans thinking they are saving money would be surprised to learn they might actually be paying more.”
These findings suggest that many bank customers would likely benefit financially by either “switching mortgage providers, or approaching their bank for a better rate and indicating they are prepared to switch to get one,” Sims said.
“It seems existing customers are not being rewarded for their loyalty; in fact they are worse off. For example on a $375,000 residential mortgage, a new borrower paying an interest rate that was 32 basis points lower would save approximately $1200 in interest over the first year of a loan.”
