Loyal customers charged high interest – ACCC study


June 15, 2020

lender-loyalty-city-banks

The Australian Competition and Consumer Commission (ACCC) inquiry interim report has revealed that customers who remain loyal to their lender are disproportionately’ spending more than new customers.   

The report has found that customers who have existing owner-occupied loans  with principal and interest repayments were paying 26 basis points more than those with new loans.

The interest rate for an existing owner occupied principal and interest loan was on average 0.26% higher than that of new loans, as of September 2019.

This difference between these interest rates has increased by one basis point since recorded in September 2018.

ACCC Chair Rod Sims has acknowledged in a media release that the difference has occurred as a result of banks attempting to increase their profitability.

Sims suggested that this was a key motive when deciding not to pass on the RBA’s rate cuts.

The inquiry findings shed an important light on bank decision making and raise questions about whether the banks could, at the time, have passed on a higher proportion of those RBA cash rate cuts to their mortgage customers, said Sims.

Our analysis shows that even a small further reduction in Interest rates could potentially save thousands of dollars over the life of a loan, he said.

Increased competition’ to win over new customers has been cited as the predominant driver of the discounted interest rates that are being offered on newer loans.

The big four banks have been implementing pricing strategies, offering faster approval times and offering to match competitive headline rates of other lenders.

The inquiry also highlighted the culture of oligopoly’ which is prevalent between the big four banks.

This has been seen through the way in which the big four banks have been focused on the actions of each other when considering their pricing , whilst disregarding smaller lenders.

Such competition has meant that banks are more inclined to provide new customers with discounts rather than reduce the headline variable rates for all customers.

This is because reducing headline variable rates would mean that there would be a reduction in price for all existing customers.

Providing a discount to new customers while maintaining variable rates for existing customers would prevent this reduction in profit.

Rod Sims acknowledged in a media release that in doing so, banks were attempting to shore up their profitability during a period of low interest rates.  

The inquiry also found that the banks deliberately failed to maintain transparency as part of this strategy to increase their profit margins. 

Existing customers who remain oblivious to these potential victims have been considered the victims of the bank’s failure to remain transparent.

ACCC found an overall lack of price transparency, particularly for new loans, making it difficult for customers to compare home loans, said Josh Frydenberg in a media release.

This has been seen through the disparities in the standard variable rates advertised by the big four banks which fail to mention the discounts that almost 90% of customers receive.

This is supported by the fact that as of October 31 2019, the difference between the headline variable rate and average rate of owner occupied loans was between 123-131 basis points.

Frydenberg has said that this lack of transparency highlights the need for customers to remain highly engaged and shop around to get access to the best deal including from their existing financial institution

For customers with an existing loan, the ACCC is encouraging customers to consider asking for discounts or shopping around to avoid missing out better deals.

“It is worth ringing up your bank every year to get a better deal and it’s worth threatening to move or moving to another lender, Rod Sims told the Australian Financial Review

Statistics obtained from the ACCC have revealed that it is likely customers will be given a discount if it is asked for as lenders do not want to lose existing customers.

During the final quarter of 2019, 216 499 customers were granted discounts. This had increased from 156 058 in the previous quarter of the year.

These figures include discounts that were customer initiated as well as bank-initiated prince reductions.

An anonymous lender told the inquiry that a customer who fails to ask for a discount for a couple of years’ could be paying an interest rate that is 30-40 basis points higher without the discounts.

Receiving such discounts could mean that for a loan valued at approximately $386,000, customers would be saving approximately $5000 in interest through the average discount of 128 basis points.

The ACCC also estimates that refinancing an existing loan valued at $200,000 could save a customer $850 in the future

However, the inquiry also found that receiving a price reduction on your existing loan may not be able to provide customers with the same level of savings as refinancing.

It has been observed that the discounts on existing loans are not as large as the discounts for new loans, making refinancing a more attractive option.

Despite these evident benefits that can come about through refinancing, previous data collated by the ACCC in their 2018 Residential Mortgage Inquiry found that borrowers are failing to remain engaged with the market.

The inquiry found that a main reason for the low market activity was due to the difficulties encountered when trying to compare loans.

The ACCC is aiming to tackle this problem through the release of new comparison tools which may assist customers in searching for the best loan for them.

This includes the Consumer Data Right’ tool which will enable businesses and individuals to access product reference data of banks and an interest rate tool developed by ASIC.

Lenders, brokers and aggregators must step up to make it easier for consumers to meaningfully compare loan options said ASIC Commissioner Sean Hughes in a media release.

We are working with other regulators to develop a new home loan interest rate tool to improve price transparency for consumers to compare options, said Hughes.  

It is hoped that this increase transparency will make it easier for customers to refinance their existing loans and reduce the number of customers missing out discounts.  

Words by Vidya Kathirgamalingam.

Sources:

ASIC research highlights the importance of reforms for mortgage brokers and home lending

Media Release – Maintaining profitability important in big banks’ interest rate cut decisions

Australian Treasury Statement – Release of ACCC Home Loan Price Inquiry interim report

ACCC Home Loan Price Inquiry Report – PDF


Written by Refinancing.com.au


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