Mortgage changes recommended by economics committee

Improving competition and transparency in mortgage lending forms part of the House standing committee on economics’ final report from its inquiry into promoting economic dynamism, competition, and business formation, released this morning (27 March).

The Better Competition, Better Prices report puts forward 44 recommendations to the government after 14 months of evidence gathering and analysis from numerous sectors of the economy.

The report recommended:

• A requirement for banks to notify customers of the base interest rate at the end of an introduction period when a deposit product is offered.
• A requirement for banks to alert customers when they are reaching the threshold for eligibility for a bonus interest rate.
• A requirement for banks to notify deposit holders of changes to their interest rates.

According to the committee, there has been an increase in pricing discrimination from banks, charging new customers lower interest rates than customers who had been with the bank for an extended period.

The report cited research from the Australian Competition and Consumer Commission’s (ACCC) 2020 inquiry into home loans that said that ‘loyalty tax’ had been a trend since 2015.

The report also suggested that there should be improved regulation of the financial services market. Specifically, the report said that APRA should provide “an independent benchmark” for variable rates for new/switching customers over the previous 12 months.

The report stated that the benchmark should be published to mortgage brokers and financial services advisers to “improve their capacity to contact new clients to improve churn rates”.

The report recommended: “That the Treasury Competition Policy Taskforce examine mechanisms to increase consumer engagement with mortgages and deposit products.”

Dr Daniel Mulino, chair of the committee said: “Additional mortgage products for consumers could also be considered, such as tracker mortgages and residential-backed mortgage securities.”

Considering the merit of the Canadian residential mortgage-backed securities (RMBS) model, the committee recommended that the government “examine the merits” of introducing a government-backed RMBS scheme.

Former ASIC chairman Greg Medcraft called for the creation of a public RMBS system to improve mortgage competition in Australia and ensure a more equitable funding model for mortgage lenders.

He noted in the report that introducing an RMBS model would allow smaller banks to compete with major banks on a “level playing field” and result in lower interest rates for mortgagors.

It also recommended that APRA investigate the “suitability of macroprudential regulation of medium and smaller banks” and their subsequent capital requirements when compared to the big four banks.

Tracker mortgages

The committee’s final recommendation was that the government consider developing a pilot program for tracker mortgages, with co-operation from the banking sector. A tracker mortgage is a variable rate home loan that changes with the cash rate automatically and, according to the report, would “reduce the likelihood of disengaged consumers drifting away from the best available rate”.

Medcraft’s views on tracker mortgages were cited in the report, where he stated that employing tracker mortgages dependent on a margin above the cash rate was “the only fair way forward” considering the “opaqueness of the mortgage market”.

The committee noted that those with tracker mortgages were at “less risk of paying an interest rate above the best available rate at the time, even if they do not pay attention to the market.”

The House standing committee on economics has previously recommended tracker mortgages following its inquiry into the four major banks in October 2023.

The former chief executive of the Australian Bankers’ Association (ABA), Steve Münchenberg, previously said that tracker mortgages would not offer the “best outcomes” for mortgagors, as the cash rate is not the only factor that affects the cost of mortgages for banks.

The committee noted in its report that three out of the four major banks (including CBA, NAB, and Westpac) have previously flagged in 2016 that tracker mortgages were a “risk” to the banks and the “stability of the financial system”.

ANZ was the only major bank at the time to state that there was a ‘valid place’ for tracker mortgages.

[Related: Public RMBS system would improve mortgage competition: Greg Medcraft]