Major four banks standard variable rate highest since late 2008

Major four banks standard variable rate highest since late 2008

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.

 

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The ratings are between 0 and 5, shown to one decimal point, with 5.0 as the best. The ratings should be used as an easy guide rather than the only thing you consider. For example, a product with a rating of 4.7 may or may not be better suited to your needs than one with a rating of 4.5, but both are probably much better than one with a rating of 1.2.

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Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

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A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

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Also known as a construction home loan, a building in course of erection (BICOE) loan loan allows you to draw down funds as a building project advances in order to pay the builders. This option is available on selected variable rate loans.

What is a redraw fee?

Redraw fees are charged by your lender when you want to take money you have already paid into your mortgage back out. Typically, banks will only allow you to take money out of your loan if you have a redraw facility attached to your loan, and the money you are taking out is part of any additional repayments you’ve made. The average redraw fee is around $19 however there are plenty of lenders who include a number of fee-free redraws a year. Tip: Negative-gearers beware – any money redrawn is often treated as new borrowing for tax purposes, so there may be limits on how you can use it if you want to maximise your tax deduction.

Mortgage Balance

The amount you currently owe your mortgage lender. If you are not sure, enter your best estimate.

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A construction loan is loan taken out for the purpose of building or substantially renovating a residential property. Under this type of loan, the funds are released in stages when certain milestones in the construction process are reached. Once the building is complete, the loan will revert to a standard principal and interest mortgage.

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Also known as the comparison rate, or sometimes the ‘true rate’ of a loan, the average annual percentage rate (AAPR) is used to indicate the overall cost of a loan after considering all the fees, charges and other factors, such as introductory offers and honeymoon rates.

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