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.
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.
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.”