The opaque, discretionary pricing of residential mortgages by banks makes it difficult and time consuming for borrowers to shop around and stifles price competition, a report by the ACCC has found.
The ACCC’s Residential Mortgage Price Inquiry monitored the prices charged by the five banks affected by the government’s Major Bank Levy between 9 May 2017 and 30 June 2018.
The ACCC’s final report found the unnecessarily high search costs or effort required by borrowers to find better prices reduces their willingness to shop around, but that many borrowers who negotiate with their bank can get a much better price.
“Pricing for mortgages is opaque and the big four banks have a lot of discretion. The banks profit from this and it is against their interests to make pricing transparent,” ACCC Chair Rod Sims said.
“Borrowers may not be aware they can negotiate with their lender on price, both before and, particularly, after they have established their mortgage.”
As at 30 June 2018, an existing borrower with an average-sized mortgage could initially save up to $850 a year in interest if they negotiated to pay the same interest rate as the average new borrower at the five banks under review. For many borrowers the gain will be much larger.
It appears that media attention on banks from the Banking Royal Commission, the Productivity Commission’s Inquiry into competition in the Australian financial system and the ACCC’s inquiry prompted some borrowers to approach their lender for a better rate.
The ACCC reports that about 11 per cent of borrowers with variable rate mortgages had the price of their current residential mortgage reduced by one of the five banks under review in the year to 30 June 2018.
“I encourage more people to ask their lender whether they are getting the lowest possible interest rates for their residential mortgage and, as they do so, be ready to threaten to switch to another lender,” Mr Sims said.
“I am afraid that the threat of switching banks will often be necessary to achieve a competitive mortgage rate.”
When directing the ACCC to conduct this inquiry, the Treasurer requested the ACCC to report whether it found any evidence of the five banks passing on the costs associated with the Major Bank Levy to residential mortgage borrowers.
“The ACCC found no evidence that the five banks changed prices specifically to recover the cost of the Major Bank Levy, whether in part or in full, during the price monitoring period,” Mr Sims said.
The ACCC did find that measures announced by APRA in March 2017 to limit new interest-only residential mortgage lending created an opportunity for banks to synchronise increases to headline variable interest rates for interest-only mortgages.
“We were not surprised banks seized the opportunity to increase prices for interest-only loans. These price rises were enabled by the oligopoly market structure in which the big four banks collectively have a market share of about 80 per cent,” Mr Sims said.
ANZ was the first bank to announce increases to these interest-only rates in June 2017. It did so safe in the knowledge that its move would put the other banks at risk of breaching the APRA limits.
The other four banks, therefore, announced similar changes in the same month. Together, the big four banks estimated revenue gains of over $1.1 billion for their 2018 financial year, primarily as a result of these rate increases.
“We consider that ANZ increased its rates, clear in its belief that, given the APRA limits, the other big four banks would follow its lead, and this expectation proved correct,” Mr Sims said.
The ACCC calculated that the rate increases by the five banks would have added, in the first year, about $1300 in interest charged to the average-sized owner-occupier interest-only standard variable mortgage.
“Such is the oligopolistic nature of banking that the banks all took the opportunity to increase rates on both new and existing interest-only mortgages, despite APRA’s measures only applying to new lending,” Mr Sims said.
The ACCC also compared the approach to pricing of a sample of seven banks that were not subject to the Inquiry. Three of these banks were particularly focussed on competing on price, and therefore have lower rates. Some of the banks in our sample rely heavily on brokers and aggregators to gain market share. The ACCC notes that these banks, and other lenders in a similar position, are likely to be more vulnerable to future regulatory changes that affect the use of brokers as a distribution channel.
In this report the ACCC notes that the new Consumer Data Right will, among other things make it much easier for consumers to compare available interest rates.
“The ACCC looks, in particular, to the Consumer Data Right to empower consumers in their dealings with banks,” Mr Sims said.
Further information at Residential mortgage products price inquiry
On 9 May 2017 the Treasurer, the Hon. Scott Morrison MP, issued a direction to the ACCC to inquire into prices charged or proposed to be charged by Authorised Deposit-taking Institutions affected by the Major Bank Levy in relation to the provision of residential mortgage products in the banking industry in Australia. The Major Bank Levy came into effect from 1 July 2017.
The five banks affected by the levy are Australia and New Zealand Banking Group Limited (ANZ), Commonwealth Bank of Australia, Macquarie Bank Limited, National Australia Bank Limited, and Westpac Banking Corporation.
The ACCC used its compulsory information gathering powers to obtain documents and data from the five banks on their pricing of residential mortgage products. The ACCC supplemented its analysis of the documents and data supplied by the five banks with data from the Reserve Bank of Australia (RBA), Australian Prudential Regulation Authority (APRA) and the Australian Bureau of Statistics (ABS).
This Inquiry was the first task of the ACCC’s Financial Services Unit (FSU), which was formed as a permanent unit during 2017 following a commitment of continuing funding by the Australian Government in the 2017-18 Budget. Alongside the ACCC’s role in promoting competition in financial services through its enforcement, infrastructure regulation, open banking, and mergers and adjudication work, the FSU will monitor and promote competition in Australia’s financial services sector by assessing competition issues, undertaking market studies, and reporting regularly on emerging issues and trends in the sector.
The FSU is currently examining the pricing of foreign currency conversion services in Australia to evaluate whether there are impediments to effective price competition in the sector. An inquiry report is to be delivered to the Treasurer by 31 May 2019.
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