The interim report examines home loan prices charged by the big four banks (ANZ, CBA, NAB and Westpac) between 1 January 2019 and 31 October 2019 and more particularly, the factors in the banks’ decisions on headline variable rates.
The report found that despite the fact that average interest rates charged on home loans fell between January 2019 and October 2019:
- maintaining profitability was a key consideration (though not the only consideration) for the big four banks when deciding whether to reduce mortgage rates in line with Reserve Bank of Australia (RBA) cash rate cuts during 2019
- reductions in funding costs to banks do not automatically flow through to customers
- existing bank customers tend to pay more for their loans in comparison with new customers ('loyalty tax')
- a lack of price transparency (due to the fact that discounts are not reflected in headline rates) makes comparisons between products difficult and continues to cost customers.
The ACCC said that the findings underline 'the importance of customers with existing loans reviewing their home loan products on a regular basis' and ACCC Chair Rod Sims called on customers to 'shop around'.
Similarly, announcing the release of the report, Treasurer Josh Frydenberg said that the 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 ACCC’s final report, which will be delivered to the Treasurer on 30 November 2020 (the deadline has been extended because of COVID-19) will consider barriers to consumers switching to alternative home loan suppliers.
An inquiry into the market for the supply of home loans
On 14 October 2019, the Treasurer issued a direction to the Australian Competition and Consumer Commission (ACCC) to conduct an inquiry into the market for the supply of home loans.
The ACCC released its interim report on 27 April 2020. The interim report focuses on prices charged for home loans since 1 January 2019, taking into account:
- the difference between advertised interest rates and interest rates paid by customers;
- the difference between interest rates paid by new and existing customers; and
- home loan suppliers’ pricing decisions following changes in the RBA’s target for the cash rate, including the extent to which changes were due to suppliers’ cost of funds and the timing of the suppliers’ announcements.
The final report will consider impediments to consumer switching.
Interim report key findings
Maintaining profitability was a key consideration in bank decision making
The interim report found that the big four banks balanced a range of factors when making their headline variable rate decisions following the cash rate reductions in 2019 but that recovering profits was central to their decisions to not always fully pass through the lower rates to mortgage customers.
Commenting on this, ACCC Chair Rod Sims said that 'the banks were attempting to shore up their profitability during a period of low interest rates…It was their strong preference, after the RBA’s cuts, not to further reduce the rates customers were earning on some deposit products as they approached zero per cent. The banks’ reluctance to cut these deposit rates led them to anticipate lower profits, which they aimed to recover by not always fully passing through cash rate cuts to their mortgage customers'.
The report also found that the big four banks benefited from a sustained decrease in their funding costs during much of 2019. According to the ACCC, though the headline rates for owner-occupier home loans with principal and interest repayments fell overall during 2018 and 2019, the banks’ funding costs fell even more over the same period. ACCC Chair Rod Sims suggests that this sheds 'an important light on bank decision making' and raises 'questions about whether banks could, at the time, have passed on a higher proportion of those RBA cash rate cuts to their mortgage customers.'
Loyalty tax? On average customers with new loans continue to pay lower interest rates than customers with existing loans
The report found that:
- At the end of September, customers with new owner-occupier loans with principal and interest repayments were paying on average, 26 basis points less than customers with existing loans. Further, the difference was 'usually even more significant for customers with older loans'. This is attributed to the banks' focus on offering increasingly large discounts on new loans.
- The banks were aware that existing loan customers 'generally paid higher interest rates than their customers with new loans'. According to the report, routine pricing documents considered by decision makers showed either that, across their variable rate home loan portfolios, discounts were larger for new loans; or that customers with new loans, on average, were paying lower interest rates than customers with existing loans.
- The ACCC observes that the findings underline 'the importance of customers with existing loans reviewing their home loan products on a regular basis'.
Average discounts on existing loans also increased
The report also found that the average discount on existing loans increased over the period 30 September 2018 and 30 September 2019.
The ACCC considers that there are three key reasons behind this: 1) some customers with existing loans, who previously paid a relatively high interest rate, discharging their existing home loans, including by refinancing to a new loan or new lender; 2) some customers with existing loans obtaining a price reduction on their current loan that saw their interest rate become the same as or closer to interest rates applying to new loans; and 3) some customers who previously obtained a ‘new loan’ rate (either as a buyer of a new property or after refinancing) becoming a customer with an existing loan at a later time.
Comparison remains difficult for consumers
The report found that comparisons between home loan options are not straightforward for customers because headline variable rates (which do not reflect discounts) were not an accurate indicator of what most consumers should expect to pay.
According to the ACCC, as at 31 October 2019, 89% of variable rate home loans with the big four banks received a discount (advertised and/or discretionary) off the bank’s relevant headline variable rate and 59% were charged at least 90 basis points less than the relevant headline variable rate.
According to the report, the gap between headline variable rates and the average interest rates paid by customers increased for each of the big four banks between 30 September 2018 and 31 October 2019 due to an uptick in the number of customers receiving a discount.
New tools designed to help home loan customers compare prices, negotiate with lenders and switch loans to obtain a better deal
The report highlights a number of tools that are expected to assist borrowers in obtaining a better deal on their home loans. These include:
- Open banking: The ACCC observes that the Consumer Data Right, which will apply first in the banking sector (Open Banking), will improve consumers’ ability to compare and switch between home loan products and suppliers.
- ASIC interest rate transparency tool: The Australian Securities and Investments Commission’s (ASIC) Moneysmart Mortgage calculator will shortly be enhanced to include information on average interest rates for new loans across borrower and repayment types. The calculator will provide consumers with a benchmark against which they can compare offers from lenders or their current interest rate.
The ACCC and the Treasurer encourage consumers to 'shop around'
Commenting on the report findings ACCC Chair Rod Sims encouraged customers to 'shop around'. Despite the COVID-19 pandemic and the accompanying potential financial stress consumers might be under, Mr Sims encouraged customers to take the time to review their loan options.
'Our analysis shows…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. For example, a customer with an average-sized new, owner-occupier, principal and interest mortgage of $386,000 could save about $5000 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' Mr Sims said.
In a similar vein, in a statement acknowledging the release of the report, Treasurer Josh Frydenberg said that the 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.'
Mr Frydenberg added that 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'.
Finally, Mr Frydenbergsaid that the government has been focussed on ensuring that its actions in responding to the 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; andenabling a broad cross-section of lenders to participate in the Coronavirus SME Guarantee Scheme, with 39 lenders now approved to participate in the Scheme.
