On Saturday (5 December), the government released the Australian Competition and Consumer Commission’s (ACCC) Home Loan Price Inquiry final report.
The inquiry, commissioned by government in October 2019, sought to review the mortgage pricing process and make moves to ensure the pricing practices of Australia’s financial institutions are better understood and made more transparent.
An interim report, released in April 2020, found that headline variable mortgage interest rates are not an accurate indicator of the interest rates customers actually pay due to discounts offered by banks. It also found that new borrowers continue to pay less on average than existing borrowers and that existing borrowers were prevented from easily switching lenders/rates by opaque, cumbersome and time-consuming processes.
The ACCC’s final report found that there were barriers or challenges facing borrowers at nearly every stage of the home loan process, including:
- a lack of borrower engagement to look for a better deal, despite there being significant gains from switching to a home loan with a lower interest rate;
- a lack of easily accessible, transparent and straightforward pricing information, resulting in high search costs; and
- unclear, uncertain, costly and lengthy discharge processes that in turn cause borrowers to give up looking for alternative products.
In its 94-page report, the ACCC found that, as at September 2020, borrowers with home loans between three and five years old paid on average about 58 basis points more than the average interest rate paid for new loans.
Further, it found that borrowers with loans more than 10 years old were, on average, paying approximately 104 basis points more than the average interest rate paid for new loans.
For example, it outlined that a borrower with a home loan of $250,000 could save more than $1,400 in interest in the first year by switching to a loan with the lower, average interest rate paid for new loans. Over the remaining term of the loan, that borrower could save more than $17,000 in interest.
As such, the ACCC is recommending four changes that could make mortgage pricing more transparent and reduce barriers to switching.
A prompt for variable rate borrowers
The commission is recommending that all lenders should be required to provide borrowers with variable rate loans originated three or more years ago with an annual prompt to encourage borrowers to engage in the home loan market to see if they could benefit from switching lenders or home loan products.
This prompt should encourage customers to contact their existing lender to ask for a better rate and “also encourage borrowers to contact their mortgage broker”.
A standardised ‘discharge authority’ form
The ACCC has recommended that all lenders should be required to provide a standardised discharge authority form to borrowers to complete and allow for “appropriately authorised third parties” (for example, a settlement agent, mortgage broker or new lender) to complete and submit discharge forms on borrowers’ behalf.
“The form should be easy to access, fill out and submit. Lenders should adopt an identical standard form template rather than agreeing to common criteria and continuing to design their own forms, which would still potentially allow them to add fields or make forms unnecessarily complex,” the report reads.
According to the ACCC, the form should only request details from the borrower that are necessary for their discharge request to be processed.
It suggested that the design and implementation of the form would require further consultation with industry and regulators.
A maximum time frame for existing lenders to process discharge requests
Lenders should be subject to a maximum time limit of 10 business days to complete the discharge process, the ACCC suggested.
This would cover the period from when the borrower (or a third party acting on their behalf) submits the discharge authority form to when the existing lender is ready to begin the settlement process.
Continued monitoring of competition and prices in the home loan market
The final recommendation is for the ACCC to “continue to inquire into and monitor competition and pricing in the home loan market, under government direction”.
This new inquiry, reporting to the Treasurer annually over a five-year period from 2022, would focus on the 10 largest lenders in the home loan market and consider other lenders or groups of lenders (such as non-ADIs) as competition issues are identified that involve or impact those lenders.
It would look at the difference between prices paid on new and existing home loans; the difference between the prices advertised for home loans and the prices borrowers actually pay; the prices charged by, and pricing decisions of, lenders; the impact of current and future government initiatives and regulatory interventions, including the Consumer Data Right and the recommendations in the Home Loan Price Inquiry final report, on home loan prices, including interest rates, fees and charges; and “other emerging issues and lender practices that impede competition or outcomes for consumers that arise during the inquiry period”.
‘Lenders have no incentive to make the discharge process quick or straightforward’
While releasing the report, ACCC chair Rod Sims commented: “We remain concerned about opaque pricing in the home loan market, but are encouraged that some banks are moving to more transparency without direct intervention from the government.
“We are recommending ongoing monitoring of this market so we can ensure that this trend of improved pricing transparency continues. We may recommend further action if it does not,” Mr Sims said.
Touching on the other three recommendations, Mr Sims said: “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.
“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.
“Our recommended prompt would clearly set out for many borrowers just how much higher their interest rate is compared to new borrowers. 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. It would also encourage lenders to offer existing customers better rates, promoting greater competition in the sector.”
He continued: “Existing lenders want to keep their borrowers, so have no incentive to make the discharge process quick or straightforward.”
“We want it to be as easy as possible for borrowers to switch lenders, as it should be in all markets. Our recommendations are designed to make this process faster, less confusing and less frustrating.”
Mr Sims added: “The Consumer Data Right will also assist the process of looking for a better deal and switching, by allowing borrowers to direct their bank to share their home loan data with accredited third parties, such as other lenders or comparison services.”
Speaking after the report was released over the weekend, Treasurer Josh Frydenberg said the findings “underscore the government’s continued commitment to a number of major reforms to increase competition across the banking industry, including credit reforms that will remove unnecessary barriers to accessing credit and the implementation of the Consumer Data Right, which will empower consumers to more easily compare and switch between home loan products and lenders.
“The government will consider the report and respond in due course,” he said.
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.