Big four intentionally muddy mortgage process

by Madison Utley29 Apr 2020

In a report released this week, the ACCC revealed that a number of behaviours evidenced at Australia’s big four banks, including the setting of interest rates and the pricing of mortgages, are negatively impacting consumers.

The ACCC Home Loan Price Inquiry interim report showed that recovering and maintaining profits was “central” to the major banks’ decision not to pass on the Reserve Bank’s full June, July and October 2019 rate cuts.

“The banks were attempting to shore up their profitability during a period of low interest rates,” explained ACCC chair Rod Sims.

“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 zero per cent.

“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.”

The lack of passing savings to borrowers was compounded by the report also finding the big four benefitted from a sustained decrease in their funding costs during much of 2019.

Banks do not proactively lower their standard variable rates when the overall cost of funds comes down; rather, they usually reserve reductions for when the RBA announces a cut to the cash rate.

Further, the interim report found a “lack of price transparency” that makes it difficult for consumers to compare different mortgage products and switch to a loan which better meets their needs; additionally, higher interest rates are provided to existing customers than are available for new borrowers, which also has had a negative impact on Aussie consumers.

At the end of September, customers with new owner-occupier loans with P&I repayments were paying, on average, 26 basis points less than customers with existing loans; the difference grows even wider for customers with older loans.

The report also found that headline rates did not accurately reflect the price most customers actually paid for their home loans as the “overwhelming majority” received discounts, including “opaque” discretionary discounts.

“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,” said Sims.

“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 ACCC’s final report will consider barriers to consumers switching to alternative home loan suppliers and is scheduled for release later this year.

There are a number of major reforms in the pipeline to increase competition across the banking industry, including the implementation of the Consumer Data Right which should enable easier comparing and switching among loan products and lenders.