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The big banks' home loans are opaque, not competitive, and 'no frills' mortgages do not necessarily mean cheap, according to the Australian Competition and Consumer Commission.
Key points:
- Basic, or 'no frills' mortgages not always cheapest
- New borrowers pay significantly lower interest rates on average than existing borrowers
- Little evidence of vigorous price competition
The ACCC's interim report from its Residential Mortgage Inquiry puts the banks under even more pressure as they struggle to defend questionable lending practices being uncovered at the banking royal commission.
The interim report found opaque pricing of discounts offered on residential mortgage rates made it difficult for customers to make informed choices.
The ACCC inquiry focuses on the big four banks, as well as Macquarie Bank, which together account for about $1.3 trillion, or 84 per cent, of outstanding residential mortgages in Australia.
The ACCC said the big banks appeared more interested in maintaining the current positions than offering borrowers a real choice.
"We do not often see the big four banks vying to offer borrowers the lowest interest rates," ACCC chairman Rod Sims said.
"The discounting by the big banks lacks transparency and it's almost impossible for customers to obtain accurate interest rate comparisons without investing a great deal of time and effort.
The report also found the average interest rates paid for basic or 'no frills' loans were often higher than for standard loans at the same bank.
"We think many customers who opted for 'basic' or 'no frills' loans thinking they are saving money would be surprised to learn they might actually be paying more," Mr Sims said.
| Lender | Residential mortgage portfolio ($ billion) | Share of residential mortgages (percentage) |
|---|---|---|
| CBA | 413 | 25 |
| Westpac | 398 | 24 |
| ANZ | 256 | 15 |
| NAB | 252 | 15 |
| Macquarie Bank | 28 | 2 |
| Other banks | 253 | 15 |
Source: APRA/ACCC
'No frills' does not mean cheapest
The ACCC found while basic, or 'no frills' loans were promoted by banks as a cheap option they may not be the cheapest loan on offer.
The basic loans, such as ANZ's Simplicity Plus or CBA's Economiser products, are generally priced about 65 basis points lower than the headline rate of the same bank's standard variable rate.
"However, once discounts are factored in, the average interest rate actually paid by existing borrowers on basic loans at the big four banks since July 2015 has often been higher than the average rates paid by existing standard variable loan borrowers," the ACCC report found.
"We consider it to be doubtful that this would accord with most borrowers' expectations."
Existing borrowers generally pay more than new customers
The ACCC report also found it did not necessarily pay off to be a rusted-on customer.
The practice of luring in new borrowers with discounts left them paying "significantly" lower rates on average than existing borrowers.
Examining data from June 2016 and June 2017, the ACCC concluded existing borrowers on standard variable interest rate residential mortgages were paying rates up to 32 basis points higher (on average) than new borrowers.
On the average $375,000 mortgage that would equate to a saving of about $1,200 over the first year of the loan.
Competitive market? Not really
The report also painted a picture of an oligopoly interested in avoiding the disruption of mutually beneficial pricing outcomes, rather than consistently vying for market share by offering the lowest interest rates.
"The big four banks focus largely on each other when they determine headline interest rates and discounts on variable rate residential mortgages," the ACCC said.
"The actions and reactions of over 100 other residential mortgage lenders do not appear to have had a significant bearing on interest rate decisions for the big four banks' main brands during the period examined."
The more positive news for consumers was it appeared the big five lenders who were subject to the Major Bank Levy announced in last year's federal budget had not jacked up rates to cover the cost of the new impost.
"The inquiry banks have all decided to treat the cost of the Major Bank Levy as an interest expense in their financial statements," the report found.
The ACCC will release its final report sometime after June 30 this year.
Topics: consumer-finance, consumer-protection, banking, housing-industry, australia
First posted