The Morrison Government has today released the Australian Competition and Consumer Commission’s (ACCC) Home Loan Price Inquiry interim report.
In October 2019, the ACCC was directed by the Government to undertake an inquiry into the pricing of residential mortgage products to ensure the pricing practices of Australia’s financial institutions are better understood and made more transparent.
The interim report has also examined the factors influencing interest rate setting decisions and the pricing of mortgages.
With respect to the factors influencing interest rate setting decisions, the ACCC found that a wide range of factors including bank profitability, the implications for deposit rates, community expectations and overall competitive position were considered.
In relation to standard variable interest rates (“SVR”) offered by the major banks, the ACCC found an overall lack of price transparency, particularly for new loans, making it difficult for customers to compare home loans.
Specifically, the ACCC found that the SVR is not an accurate indicator of the actual prices paid by major bank customers, with the overwhelming majority (around 90 per cent) receiving an average 128 basis point (1.28%) discount off the SVR. For the average mortgage holder, this discount represents a saving of nearly $5000 in the first year alone.
The ACCC also found that new customers are paying on average 26 basis points (0.26%) less than existing customers on owner occupied loans. This difference is even more significant for older loans, with customers who have had their loan for more than five years paying 40 basis points (0.40%) above the price on newer loans.
The report also makes clear that banks do not proactively reduce the SVR when their overall cost of funds come down. Instead, banks typically only announce a reduction in the SVR when the RBA announces a reduction in the cash rate – notwithstanding that the cash rate only represents a part of their overall funding costs. The ACCC also found that the time taken to pass on the announced reduction in SVR to customers varies across the banks with additional revenue being a motivator for increasing the delay in some circumstances.
These findings underline the importance of greater transparency and competition in the sector and need for customers to remain highly engaged and shop around to get access to the best deal – including from their existing financial institution.
The findings also underscore the Government’s continued commitment to a number of major reforms to increase competition across the banking industry, including implementation of the Consumer Data Right which will empower consumers to more easily compare and switch between home loan products and lenders.
At the same time, the Government has been focussed on ensuring that its actions in responding to the Coronavirus pandemic support competition, including through:
- the $15 billion in funding provided to the AOFM to invest in wholesale funding markets used by small ADIs and non-ADI lenders; and
- enabling a broad cross-section of lenders to participate in the Coronavirus SME Guarantee Scheme, with 39 lenders now approved to participate in the Scheme.
The ACCC’s Home Loan Price Inquiry final report will examine the impediments consumers face when switching lenders and will provide recommendations focused on driving further competition in the home loan market.
In light of the coronavirus pandemic, the Government will extend the timeframe for the Inquiry’s final report until 30 November 2020.