Lenders charging loyalty tax, confirms RBA

The Reserve Bank of Australia (RBA) has released its quarterly statement on monetary policy, containing an analysis of new mortgage rate data collected by the central bank, which has found that the price differential between new and outstanding variable rate home loans increases with the age of a loan.

According to the RBA, borrowers with variable rate mortgages originated four or more years ago – which account for less than half of all securitised loans assessed – are charged an interest rate approximately 40 bps higher than borrowers with newly originated loans.

“For a loan balance of $250,000, this difference implies an extra $1,000 of interest payments per year,” the RBA observed.

In his opening address to the House of Representatives on Friday (7 February), RBA governor Philip Lowe stated that the pricing gap reflects changes in discounting behaviour from lenders.

“This reflects the fact that the discounts offered to lenders’ standard variable rates have risen over recent years, and these discounts tend to be fixed for the life of the loan – what might have once seemed a big discount might not be so big now,” he said.

The RBA data revealed that the average discounts on standard variable rates offered by major banks on new loans increased from approximately 100 bps in 2015 to an average of approximately 175 bps in 2019.

The RBA claimed that the discounting disparity enables lenders to remain competitive in the marketplace without having to adjust pricing for existing customers.

However, it was noted that interest rates charged on outstanding variable rate loans have declined by more than standard variable rates in recent years, which it attributed to a readiness to negotiate for larger discounts from “well-informed borrowers”.

Competition driving rate gap

The RBA has acknowledged that aggressive pricing behaviour from lenders for new borrowers reflects heightened competition in the mortgage market.

“In part, the variation in interest rates paid by different borrowers reflects their creditworthiness or the riskiness and features of loans. In addition, it reflects the different interest rates offered by different lenders,” the RBA noted.

“However, the time at which the mortgage was taken out also has an important influence on the interest rate paid.

“This reflects the tendency for competitive pressures to be strongest for new and other borrowers who are in the process of shopping around for a loan.”

In his appearance before the standing committee on economics, Mr Lowe encouraged mortgage-holders to capitalise on the competitive dynamic in the market by reviewing their interest rate and refinance to a better deal.

“As I have said a number of times recently, if you took your loan out a while ago, it is worth shopping around and checking in with your lender to see if it can now give you a bigger discount,” he said.

This comes ahead of the commencement of the Australian Competition and Consumer Commission’s (ACCC) Home Loan Price Inquiry, announced in October 2019.

The inquiry – commissioned by Treasurer Josh Frydenberg after lenders failed to pass on the RBA’s cuts to the cash rate in full – will review pricing behaviour from 1 January 2019 to examine:

• the differences between advertised rates and the prices actually charged or paid;
• the differences between rates paid by existing customers and those paid by new customers (front and back book pricing behaviour);
• pricing decisions in response to changes to the official cash rate; and
• factors preventing customers from switching to cheaper home loans.

In exploring these matters, the ACCC will consider consumer decision making and biases, information used by consumers and the extent to which lenders may contribute to consumers paying more than they need to for home loans.

The announcement of the inquiry was met with stiff criticism from some sections of the banking community, including CEOs of the big four banks, who rejected suggestions that their pricing behaviour was anti-competitive.  

The ACCC is expected to hand down a preliminary report by 30 March 2020, with a final report due by 30 September 2020.

[Related: RBA weary of rate-driven mortgage boom]