Banks ‘should urge clients to refinance’

Banks would be forced to ‘prompt’ their own customers to think about refinancing their home loan as part of a set of recommendations to government.

Australian Competition and Consumer Commission chairman Rod Sims. Picture: Sean Davey

Banks would be forced to “prompt” their own customers to think about refinancing their home loan as part of a set of recom­mendations to government to boost competition in the booming mortgage market.

Borrowers with even modest mortgages could save tens of thousands of dollars over the life of their loan if they refinanced at the interest rate new customers received — almost 0.6 percentage points lower on average — the competition regulator has found in a report into home loan pricing.

“This is serious money, dwarfing the savings you can make on petrol or electricity,” said Rod Sims, chairman of the Australian Competition & Consumer Commission.

“We’ve observed that banks are like synchronised swimmers when it comes to how they set interest rates.’’

A borrower with a 10-year-old, $500,000 mortgage could save more than $50,000 if they refin­anced at a lower variable rate.

“Older loans are around 58 basis points higher than the averag­e rate for new loans, which could translate to a saving of over $17,000 over the life of a $250,000 loan for a borrower who switches, or over $34,000 over the life of a $500,000 loan,” the report finds.

The home loan pricing inquiry, which was commissioned by the federal ­government in October last year, was released on Friday and recommend­s that the government tweak legislation to require banks to “prompt” their customers each year.

“There’s a set-and-forget approach to home loans which works against people’s interests,” Mr Sims said.

Rate­City analyst Sally Tindal said the gap between what new customers and existing customers had been paying had “absolutely been growing over time”.

Reserve Bank data shows the average rate on outstanding owner-occupier home loans was 3.2 per cent in September, compared with 2.9 per cent for new such loans.

Over 100 home lenders offer a combined total of nearly 4000 ­different loans.

The inquiry found that borrowers faced hurdles to switching and also recommended simplified discharge arrangements.

“There has been a bit of extra switching during the COVID-19 period,’’ Mr Sims said. “(It) could be because some people have had more time on their hands.

“But generally not much has changed in terms of the level of bank competition.” This is the ACCC’s second report into the home loan market, which has been routinely criticised for a lack of competition.

 

Mr Sims said new rules that allow­ed customers to digitally transfer their data between banks, known as a consumer data right, which for mortgages took effect last month, should dramatically improve competition.

“People sometimes say there isn’t much reform happening but they don’t realise CDR is a revolution,” he said.

“We’ve already got a huge number of applications who want to be data receivers, they will be banks and other institutions who want to get other banks’ business.’’

An interim report, released in April, found that the headline variable mortgage interest rates used in advertising were not a good indicator of the rates that customers actually paid, owing to the discounts banks were offering.

Ms Tindal said variable interest rate home loans with offset accounts­ were available “well below 2 per cent”.

“These loans often require the borrower to have more equity in their home but many households probably don’t realise that even if they’ve seen modest price increases over a few years you probably do have 40 per cent equity in their home,” she said.

The government is yet to ­respond to the ACCC’s four recom­mendations.