Banks' opaque pricing stifles mortgage competition

by Rebecca Pike11 Dec 2018

A report released this morning has found the opaque, discretionary pricing of residential mortgages by banks stifles competition.

The ACCC’s Residential Mortgage Price Inquiry said the lack of transparency made it difficult and time consuming for borrowers to shop around.

The report monitored the prices charged by the five banks affected by the government’s Major Bank Levy between 9 May 2017 and 30 June 2018.

It found the “unnecessarily high” search costs or effort required by borrowers to find better prices reduced their willingness to shop around, but that many borrowers who negotiate with their bank can get a much better price.

As at 30 June 2018, an existing borrower with an average-sized mortgage could initially save up to $850 a year in interest if they negotiated to pay the same interest rate as the average new borrower at the five banks under review.

ACCC chair Rod Sims said, “Pricing for mortgages is opaque and the big four banks have a lot of discretion. The banks profit from this and it is against their interests to make pricing transparent.

“Borrowers may not be aware they can negotiate with their lender on price, both before and, particularly, after they have established their mortgage.”

The ACCC also pointed to the effect of the Royal Commission, citing about 11% of borrowers with variable rate mortgages had the price of their current residential mortgage reduced by one of the five banks under review in the year to 30 June 2018.

The Treasurer had requested the ACCC to report whether it found any evidence of the five banks passing on the costs associated with the major bank levy to residential mortgage borrowers.

Sims said there was no evidence of the banks changing prices specifically to recover these costs either in part of in full.

The ACCC did find that measures announced by APRA in March 2017 to limit new interest-only residential mortgage lending created an opportunity for banks to synchronise increases to headline variable interest rates for interest-only mortgages.

Sims added, “We were not surprised banks seized the opportunity to increase prices for interest-only loans. These price rises were enabled by the oligopoly market structure in which the big four banks collectively have a market share of about 80%.”

Together, the big four banks estimated revenue gains of over $1.1billion for their 2018 financial year, primarily as a result of these rate increases.