Australia's consumer watchdog says the big four banks have made it "unnecessarily" difficult for borrowers to compare home loans, and it could be costing customers up to $5,000.
The Australian Competition and Consumer Commission's (ACCC) Home Loan Price Inquiry Interim Report has found that a lack of price transparency by the big four banks has made it "unnecessarily difficult and costly" for borrowers to find the cheapest home loan rates.
According to the report, the headline (advertised) interest rate doesn't accurately reflect the interest rate most big four bank customers actually paid for their home loans because an "overwhelming majority" (close to 90%) of customers received discounts, including under the radar discounts of between 121 and 131 basis points.
The report calculated that a customer with an owner-occupier mortgage of $386,000 making principal and interest (P&I) repayments could save $5,000 on interest payments in the first year if they went from having no discount to receiving the big four banks' average discount of 128 basis points.
Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers.
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Introductory rate products were not considered for selection. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term. Rates correct as at 03 August 2020. View disclaimer.
ACCC chairman Rod Sims blamed a lack of transparency in home loan pricing practices for making it hard for borrowers to compare home loans.
“Given the economic disruption, uncertainty and job losses stemming from the COVID-19 pandemic, many consumers may not be inclined to shop around and ask for discounts from their banks right now,” Mr Sims said.
“However, our analysis shows how that even a small further reduction in interest rates could potentially save thousands of dollars over the life of a mortgage.
"Consumers should consider this carefully when it is time to re-engage with their lender.”
The report also found that most customers with a packaged home loan paid an interest rate below the lowest advertised rate, while investor loans with interest-only (IO) repayments received a larger discount than an owner-occupier loan with P&I repayments.
The report noted there were signs of oligopoly behaviour and a "lack of vigorous price competition among the big four banks" which were more accommodative and focused on each other and gave little regard to smaller lenders when setting variable interest rates.
"Comparatively, other banks employed a more diverse approach to pricing," the report said.
Mortgage loyalty will cost you
The ACCC's report found that as of September 2019, customers with new owner-occupier loans making P&I repayments were paying an average of 26 basis points less than customers with existing home loans.
For customers with older loans, that figure nearly doubled. Borrowers with a loan five years old were paying an average of 40 basis points above what big four bank customers with new loans were paying.
The report calculated that for a loan size of $200,000, a customer could have saved $850 in interest repayments in the first year if they had refinanced to obtain a new loan rate.
The report urged borrowers to ask for a better rate.
"Even a small reduction in interest rates can potentially save a consumer thousands of dollars over the life of their loan," the report said.
"Customers with existing home loans should review their loan on a regular basis, and ask their lender for a better deal.
"Some customers with an existing loan may need to switch to another home loan product with their lender, or switch to another lender, to get the best deal available to them."
The report said the Consumer Data Right (CDR) - commonly referred to as open banking - will help borrowers compare and switch between home loan products and lenders, bringing more transparency to home loan prices.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2019) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.
In the interests of full disclosure, Savings.com.au and loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.
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