ACCC: Switching home loans should be a lot easier, borrowers stand to save thousands

ACCC: Switching home loans should be a lot easier, borrowers stand to save thousands

The process of switching home loans could be sped up and standardised across the industry, under four recommendations made to the federal government by the competition regulator.

Securing a mortgage can be a lot of hard work, and so it’s not uncommon for people to let the years tick away before they consider refinancing -- even though not switching lenders can cost them tens-of-thousands of dollars.

But four recommendations from the Australian Competition and Consumer Commission (ACCC) aim to make switching quicker and simpler, leading to savings for homeowners and increased competition in the banking sector.

“A significant number of Australian home loan borrowers have not switched lenders for several years, yet they stand to save so much money by doing so,” Rod Sims said, chair of the ACCC.

“There are factors standing in the way of home loan borrowers switching lenders, such as a lack of clear and transparent pricing, as well as inconvenience and time costs, but for many borrowers switching will be worth the effort.”

The ACCC, directed to examine home loans by Treasurer Josh Frydenberg in October last year, focused their inquiry on home loan prices, and the impediments borrowers have in switching to alternatives.

The federal government did not indicate if it would action the report’s recommendations.

“The government will consider the report and respond in due course,” Treasurer Josh Frydenberg said.

Saving thousands

The ACCC found borrowers with home loans between three- and five-years old were charged 3.78 per cent in interest on new loans, as of September 2020 -- an additional 0.58 per cent more than the 3.2 per cent average.

A borrower with a $250,000 mortgage would save more than $1400 in interest in the first year by switching to a loan with the lower, average interest rate, the ACCC said. Over the remaining life of the loan, they’d save $17,000 in interest.

But on a loan of $500,000, they’d save $2800 in the first year, and $34,000 over the life of the loan.

The gap between new and existing loan pricing tends to widen over time, the ACCC said. Borrowers with loans more than a decade old were paying about 1.04 per cent more when compared to the industry’s average interest rates for new loans. The cash rate -- a RBA guardpost used by banks to set interest rates -- is at a low not seen before.

“If you are someone with an older loan, you might be surprised to know that borrowers with new loans are likely walking into the very same lender you have your loan with and getting significantly lower interest rates,” Mr Sims said.

Lenders offering loans under 2 per cent

There’s plenty of lenders offering cheaper home loans than the averages used by the ACCC. The RateCity database features 50 lenders offering 126 home loan products under 2 per cent, as of 30 November.

Home loan rates starting with a ‘1’ were becoming the new norm, Sally Tindall said, research director at RateCity.

“Two years ago, the lowest variable rate was 3.44 per cent; today its 1.77 per cent,” she said.

“And it’s not just the low-cost lenders that have moved. The whole market has been forced to follow behind them.”

Signing up with one of these loans would likely result in larger savings than those calculated in the ACCC’s examples above.

A reminder, one form, ten days, a watchdog

Four recommendations were made by the ACCC to the government to make refinancing easier -- and a warning shot was sent out to the industry.

A ‘prompt’ reminder

After being on a variable rate mortgage for more than three years, a pop-up reminder should prompt mortgage holders to take another look at the offers available at the market, the ACCC said.

The prompt, which would pop up every year thereafter, would compare the borrower mortgage with the average interest rates for new loans. It would also spell out the next steps they would need to take to find a better home loan offer.

“This information would be a powerful motivation for borrowers to seek a lower rate from their current lender or to switch to a new lender,” Mr Sims said.

“It would also encourage lenders to offer existing customers better rates, promoting greater competition in the sector.”

A ‘one-size-fits-all’ discharge form

Refinancing with another provider? Under the ACCC’s recommendations, there would be one form people would need to fill out -- no matter the lender -- simplifying the process of moving from one lender to the next.

A two week countdown

The ACCC’s investigation found lenders drag their feet when they’re losing business, often “taking many weeks or sometimes months” to relinquish a mortgage.

“Existing lenders want to keep their borrowers, so have no incentive to make the discharge process quick or straightforward,” Mr Sims said.

“We want it to be as easy as possible for borrowers to switch lenders, as it should be in all markets.”

The watchdog wants lenders to relinquish mortgages within 10 business days. The countdown would start when the borrower (or an authorised third-party) submits a discharge form and would end when the existing lender begins the settlement process.

Continued monitoring

The ACCC recommended it continue monitoring the industry over the next five years under the government’s direction, providing a report to the Treasurer every year with the first scheduled for 30 September 2022.

The 10 largest lenders and other non authorised deposit-taking institutions (ADIs) would also be monitored, with a focus on the:

  • Difference between new and existing mortgage prices
  • Difference between mortgage advertised pricing and what’s actually paid
  • Pricing decisions of lenders
  • The impact of future government initiatives and regulatory interventions
  • Other emerging issues and lender practices that impede competition or outcomes

A warning shot

The ACCC said further government intervention wasn’t necessary for the time being, but warned this could change if banks were not transparent about their pricing.

“We consider that moves by lenders towards more transparent pricing, and continuing competitive and other pressures that are encouraging increased price transparency, mean that further regulatory intervention is not required at this stage,” the watchdog said, in its final report.

“However, if the ACCC observes … momentum towards price transparency has stalled, (or) if we observe consumer harm associated with a lack of price transparency, we will consider making recommendations to the government to address this.”

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Learn more about home loans

Why should I get an ING home loan pre-approval?

When you apply for an ING home loan pre-approval, you might be required to provide proof of employment and income, savings, as well as details on any on-going debts. The lender could also make a credit enquiry against your name. If you’re pre-approved, you will know how much money ING is willing to lend you. 

Please note, however, that a pre-approval is nothing more than an idea of your ability to borrow funds and is not the final approval. You should receive the home loan approval  only after finalising the property and submitting a formal loan application to the lender, ING. Additionally, a pre-approval does not stay valid indefinitely, since your financial circumstances and the home loan market could change overnight.

 

 

Can I apply for an ANZ non-resident home loan? 

You may be eligible to apply for an ANZ non-resident home loan only if you meet the following two conditions:

  1. You hold a Temporary Skill Shortage (TSS) visa or its predecessor, the Temporary Skilled Work (subclass 457) visa.
  2. Your job is included in the Australian government’s Medium and Long Term Strategic Skills List. 

However, non-resident home loan applications may need Foreign Investment Review Board (FIRB) approval in addition to meeting ANZ’s Mortgage Credit Requirements. Also, they may not be eligible for loans that require paying for Lender’s Mortgage Insurance (LMI). As a result, you may not be able to borrow more than 80 per cent of your home’s value. However, you can apply as a co-borrower with your spouse if they are a citizen of either Australia or New Zealand, or are a permanent resident.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.

What do mortgage brokers do?

Mortgage brokers are finance professionals who help borrowers organise home loans with lenders. As such, they act as middlemen between borrowers and lenders.

While bank staff recommend home loan products only from their own employer, brokers are independent, so they can recommend products from a range of institutions.

Brokers need to be accredited with a particular lender to be able to work with that lender. A typical broker will be accredited with anywhere from 10 to 30 lenders – the big four banks, as well as a range of smaller banks, credit unions and non-bank lenders.

As a general rule, brokers don’t charge consumers for their services; instead, they receive commissions from lenders whenever they place a borrower with that institution.

How do I refinance my home loan?

Refinancing your home loan can involve a bit of paperwork but if you are moving on to a lower rate, it can save you thousands of dollars in the long-run. The first step is finding another loan on the market that you think will save you money over time or offer features that your current loan does not have. Once you have selected a couple of loans you are interested in, compare them with your current loan to see if you will save money in the long term on interest rates and fees. Remember to factor in any break fees and set up fees when assessing the cost of switching.

Once you have decided on a new loan it is simply a matter of contacting your existing and future lender to get the new loan set up. Beware that some lenders will revert your loan back to a 25 or 30 year term when you refinance which may mean initial lower repayments but may cost you more in the long run.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

How can I get a home loan with bad credit?

If you want to get a home loan with bad credit, you need to convince a lender that your problems are behind you and that you will, indeed, be able to repay a mortgage.

One step you might want to take is to visit a mortgage broker who specialises in bad credit home loans (also known as ‘non-conforming home loans’ or ‘sub-prime home loans’). An experienced broker will know which lenders to approach, and how to plead your case with each of them.

Two points to bear in mind are:

  • Many home loan lenders don’t provide bad credit mortgages
  • Each lender has its own policies, and therefore favours different things

If you’d prefer to directly approach the lender yourself, you’re more likely to find success with smaller non-bank lenders that specialise in bad credit home loans (as opposed to bigger banks that prefer ‘vanilla’ mortgages). That’s because these smaller lenders are more likely to treat you as a unique individual rather than judge you according to a one-size-fits-all policy.

Lenders try to minimise their risk, so if you want to get a home loan with bad credit, you need to do everything you can to convince lenders that you’re safer than your credit history might suggest. If possible, provide paperwork that shows:

  • You have a secure job
  • You have a steady income
  • You’ve been reducing your debts
  • You’ve been increasing your savings

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.