The differences between mortgage deals offered by the big four banks are hard to spot and even harder to work out when looking for as home loan deal, according to an investigation by the consumer watchdog, the ACCC (Australian Competition and Consumer Commission).
The ACCC Residential Mortgage Price Inquiry says opaque pricing of discounts offered on residential mortgage rates makes it difficult to make informed choices.
This disadvantages borrowers who don’t regularly review their choice of lender. And those who pick the no frills or basic option often end up paying more than the standard variable rate.
The ACCC’s inquiry is monitoring the prices charged by the five banks affected by the Federal Government’s bank levy: ANZ, Commonwealth, Macquarie, NAB, and Westpac.
The watchdog says there are signs of “less-than-vigorous” price competition.
“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,” says ACCC chairman Rod Sims.
“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 are a major factor in the interest rates people end up paying. Banks offer varying levels of discounts, both advertised and discretionary.
The criteria used for determining the total discount offered to borrowers includes many factors, such as the individual borrower’s characteristics, their value or potential value to the bank, and their ability to negotiate.
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,” says Sims.
“But the potential savings from these discounts are immense.”
The report also found the average interest rates paid for basic or no frills loans are 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,” says Sims.
The inquiry found that existing residential mortgage borrowers pay significantly higher interest rates, about 32 basis points more on average, than new borrowers at the same bank.
And the majority of borrowers are paying lower interest rates than the relevant headline interest rate.
But the bank with the lowest headline rate is not always the bank with the lowest average rate paid by borrowers.
“These findings suggest that many bank customers would likely benefit from either switching mortgage providers, or approaching their bank for a better rate and indicating they are prepared to switch to get one,” says Sims.
“It seems existing customers are not being rewarded for their loyalty; in fact they are worse off.”
On a $375,000 residential mortgage, a new borrower paying an interest rate that was 32 basis points lower would save $1200 in interest over the first year of a loan.
Treasurer Scott Morrison in May last year issued a direction to the ACCC to inquire into prices charged or proposed to be charged by those banks affected by the new bank levy.
So far the five banks have not adjusted residential mortgage prices in response to the levy.