The National Consumer Credit Protection Act requires that, when advertising home loan products, lenders should provide a comparison rate that includes the interest rate as well as most fees and charges.
The Productivity Commission’s draft report into competition in the Australian financial system, released earlier this month, noted that the purpose of comparison rates is to allow consumers to compare products with different fees and charges.
“However, comparison rates are calculated using SVRs as the relevant interest rate,” the report said.
“While comparison rates could potentially improve the competitiveness of the home loan market, they are only as useful as the interest rates on which they are based.”
The commission argues that SVRs do not reflect average interest rates as many loans are priced below the SVR.
For example, in its submission to the commission, NAB explained that, as at June 2017, discretionary pricing was being applied to up to 70 per cent of new NAB-branded home loans.
The report said: “Many lenders offer discounts off this rate when home loans are taken out as part of home loan packages. Packages typically include the loan, a transaction, offset or savings account, a credit card, and some types of insurance. Lenders can also offer discounts on an individual basis, although some smaller lenders choose not to do this. Overall, it is not evident that a genuine discount is being offered when almost everyone gets it.”
The commission argues that the SVR “appears not to be a tool for consumers, but rather one for lenders”, adding that price transparency in the home loan market needs to improve.
“A first step in improving price transparency would be to enable consumers to obtain interest rates on loans actually issued. Such rates would provide a more accurate and consistent benchmark than the SVR, allowing consumers to compare across different products,” the report said.
The commission has proposed that ASIC — rather than the lenders — publish a tool that would:
• require consumers to specify certain loan and borrower characteristics
• return median interest rates on loans by different lenders that satisfy those criteria
• detail the specific fees and charges that would affect the cost of different loans.