December 9, 2010
Mortgage lenders charging excessive early exit fees have been advised to change their ways thanks to new guidance set by the Australian Securities and Investment Commission (ASIC). But will other costs for mortgages increase as a consequence?
On November 10, 2010, ASIC released a list of expectations in a bid to reduce excessive fees. Some new rules that lenders must follow, include:
- lenders must be able to explain in dollars the amount charged or the method of calculation with meaningful examples the borrowers can understand;
- they cannot increase early exit fees during the loan term;
- a list of all costs and losses that are not to be included in exit fees should be provided; and
- a list of costs and losses that will be included in an exit fee should be supplied.
But while this is good news for borrowers, does this mean that monthly service fees, interest rates or other home loan fees will increase to compensate lenders for their loss?
Will other fees increase?
RateCity's CEO, Damian Smith, says it could be a possibility. "ASIC has taken a great step towards fairer lending practices by Australia's financial institutions and we applaud them for their continuous work towards better banking," Smith says. "However our research shows that lenders could easily recoup the loss of revenue from early exit fees by increasing ongoing fees."
RateCity calculated that collectively the major four banks (Commonwealth Bank, ANZ, Westpac and NAB) earned around $79 million per year in early exit fees from borrowers switching home loans during the first two years.
If the major four banks wanted to recoup the $79 million they earn in early exit fees, they could charge every mortgage customer an additional $3.80 per month (based on approximately 1.72 million home loan customers).
What to be aware of
Borrowers considering the switch or opening new loans should be aware that the fees and charges could potentially increase. Check the establishment fees and upfront costs, and if you switch early you may have to pay the remaining fee when you break the loan contract, which could be thousands of dollars.
Some financial institutions are offering deals in response to the crackdown. For instance ING Direct will offer up to $1000 cash to any customer who switches their mortgage over from one of the major four banks as well as opens up an Orange Everyday transaction account before June next year.
Before you switch, compare home loan rates online and find one offering lower fees. Be sure to read the product disclosure statement (PDS) so you are aware of all fees and charges involved in switching.