Should mortgage exit fees remain?

May 18, 2011

Legislation banning exit fees on new home loans comes into effect on July 1, 2011. But not if a Senate committee has its way.

The Senate economics committee inquiry into competition in the banking sector claims the ban on mortgage exit fees will cripple competition in the mortgage industry by preventing non-bank lenders from offering lower interest rates and reduced fees.

Treasurer Wayne Swan announced the exit fee ban in December last year as part of a banking overhaul package he claimed was designed to assist smaller lenders, crack down on the major banks and help families locked in an uncompetitive mortgage.

Mortgage Choice CEO Michael Russell claims the removal of exit fees will have the opposite effect on non-bank lenders who have greater costs in raising funds, lack the big banks’ economies of scale and who charge exit fees to cover genuine costs of discharging a mortgage early.

In a letter to Swan, Russell said the new legislation would essentially allow the big banks to sit back and wait until “the non-banks suffocated.”

The nab and ANZ were the first to dump home loan exit fees and Westpac CEO Gail Kelly told a Senate committee in January that her organisation did not consider the ban to be “an overly big deal.”

The Senate committee has recommended that if the Gillard government does persist with the exit fee ban, it should apply only to authorised deposit-taking institutions.

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