Home loan borrowers missing out on significant savings by not switching

Many Australians with older home loans continue to pay significantly higher interest rates than borrowers with newer home loans, potentially costing them many thousands of dollars over time, the ACCC has found in a report published today.

The final report of the ACCC’s Home loan price inquiry highlights that many borrowers could save money by seeking a lower rate from their existing lender or switching to a new lender.

To encourage this process, the ACCC has recommended that lenders be required to regularly prompt borrowers whose loans are older than three years to review their current interest rate and to consider the potential benefits of switching products or lenders.

“A significant number of Australian home loan borrowers have not switched lenders for several years, yet they stand to save so much money by doing so,” ACCC Chair Rod Sims said.

“There are factors standing in the way of home loan borrowers switching lenders, such as a lack of clear and transparent pricing, as well as inconvenience and time costs, but for many borrowers switching will be worth the effort.”

“Our recommended prompt would clearly set out for many borrowers just how much higher their interest rate is compared to new borrowers,” Mr Sims said. “This information would be a powerful motivation for borrowers to seek a lower rate from their current lender or to switch to a new lender. It would also encourage lenders to offer existing customers better rates, promoting greater competition in the sector.”

The ACCC has recommended that consumer trials and testing should inform the design and presentation of the prompt.

The ACCC found that, as at September 2020, borrowers with home loans between three and five years old paid on average about 58 basis points more than the average interest rate paid for new loans. Such a borrower with a home loan of $250,000 could save more than $1,400 in interest in the first year by switching to a loan with the lower, average interest rate paid for new loans. Over the remaining term of the loan, that borrower could save more than $17,000 in interest.

As loans age, the gap between the rates paid on older loans compared with new loans widens. Borrowers with loans more than 10 years old were, on average, paying about 104 basis points more than the average interest rate paid for new loans.

“If you are someone with an older loan, you might be surprised to know that borrowers with new loans are likely walking into the very same lender you have your loan with and getting significantly lower interest rates,” Mr Sims said.

To make it easier for home loan borrowers to switch, the ACCC has also recommended lenders be required to provide a standardised Discharge Authority form to borrowers, which should be easy to access, fill out and submit.

A time limit of 10 business days should also be imposed on lenders to complete the discharge authority process, the ACCC has recommended.

“Existing lenders want to keep their borrowers, so have no incentive to make the discharge process quick or straightforward,” Mr Sims said.

“We want it to be as easy as possible for borrowers to switch lenders, as it should be in all markets. Our recommendations are designed to make this process faster, less confusing and less frustrating.”

“The Consumer Data Right will also assist the process of looking for a better deal and switching, by allowing borrowers to direct their bank to share their home loan data with accredited third parties, such as other lenders or comparison services.”

Given the significance of home loan prices to household budgets, the ACCC has also recommended continued monitoring of home loan prices and competition in the home loan market. This ongoing role is needed to continue to provide transparency on lenders’ pricing practices to consumers and the Australian Government.

During the inquiry, the ACCC closely examined a wide range of pricing information, including by using its compulsory information gathering powers to obtain information and documents from the big four banks, and obtaining additional data from the Reserve Bank of Australia and the Australian Prudential Regulation Authority.

The Home loan price inquiry’s interim report raised concerns about a lack of price transparency in the home loan market, as headline interest rates, which are relied upon by consumers shopping around, often do not reflect the actual rates paid by most borrowers. This was mainly due to the banks’ use of opaque discretionary discounts.

The ACCC has noted, however, that two of the big four banks have since reduced or are considering reducing their reliance on discretionary discounting to improve transparency for consumers.

“We remain concerned about opaque pricing in the home loan market, but are encouraged that some banks are moving to more transparency without direct intervention from the government,” Mr Sims said.

“We are recommending ongoing monitoring of this market so we can ensure that this trend of improved pricing transparency continues. We may recommend further action if it does not.”

The report is available at Home loan price inquiry

Background

On 14 October 2019, the Treasurer directed the ACCC to conduct an inquiry into the market for the supply of home loans.

The interim report focused on prices charged for home loans between 1 January 2019 and 31 October 2019 by the big four banks, Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank, and Westpac Banking Corporation.

The big four banks account for close to 80% of Australian home loans. Over 100 lenders supply home loans in Australia, offering a combined total of nearly 4 000 different home loan products.

Advice on how to switch your home loan can be found on ASIC’s MoneySmart website at Switching home loans

The findings of this inquiry reinforce and build on those in the ACCC’s earlier Residential mortgage price inquiry

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