Mortgage pricing too opaque and discounting too time consuming: ACCC

The Australian Competition and Consumer Commission (ACCC) released the final report of its mortgage price inquiry on Tuesday (11 December), which confirmed that opacity is rife in advertised headline interest rates for mortgages, causing inefficiency and stifling price competition.

The ACCC’s Residential Mortgage Price Inquiry monitored the prices charged by the five banks affected by the government’s major bank levy between 9 May 2017 and 30 June 2018.

Over the course of the inquiry, the ACCC reportedly reviewed nearly 40,000 documents from the big four banks and Macquarie and over 7,000 documents from seven other banks.

Backing the findings of its interim report released in March, the ACCC noted that the lack of transparency in discretionary discounts makes it “unnecessarily difficult” and “more costly” for borrowers to discover the best price offers, which “adversely impacts borrowers’ willingness to shop around” for a new residential mortgage or when switching lender.

“Discretionary discounts are offered on a case-by-case basis to individual borrowers, usually after the lender has assessed their application,” the report reads.

“This adds considerably to the time and effort a prospective borrower must expend to obtain accurate interest rate offers from multiple lenders. The unnecessarily high cost that prospective borrowers incur to discover price information from lenders causes inefficiency.

“The lack of transparency in discretionary discounts makes it unnecessarily difficult and more costly for borrowers to discover the best price offers.” 

As a result, the ACCC warned that some borrowers may choose to not borrow as much as they would otherwise, or may decide to defer or not to take out a residential mortgage at all.

“This represents a deadweight loss to the Australian economy and reduces welfare,” it said.

Secondly, the ACCC found that when borrowers do engage to discover better prices, they will incur “unnecessary costs to do so”.

“The bearing of these unnecessary costs is a waste of resources,” the report reads.

The banks covered by the inquiry reportedly “lack a strong incentive to reduce the cost that prospective borrowers incur to discover price information because they profit from the suppression of borrowers’ incentives to shop around,” the ACCC found.

“Moreover, the cost of price discovery is increased when [the banks] require prospective borrowers to provide evidence of another lender’s offer before revealing whether they are willing to match or better that offer,” it said.

The ACCC also looked at research from one of the lenders that showed that 40 per cent of respondents stated that their most preferred approach to mortgage pricing was for a low interest rate upfront that could not be discounted/negotiated (rather than the current system where a headline figure is often discounted).

However, the commission added that, while many borrowers are “frustrated with discretionary pricing”, it did not observe any of the [banks covered in the inquiry] moving away from the discretionary pricing of standard residential mortgages during the price monitoring period.

ACCC chair Rod Sims commented: “Pricing for mortgages is opaque and the big four banks have a lot of discretion. The banks profit from this, and it is against their interests to make pricing transparent.

“Borrowers may not be aware they can negotiate with their lender on price, both before and, particularly, after they have established their mortgage.”

The report added that these issues were therefore likely to be a key reason that many borrowers “do not obtain more than one or two quotes when looking for a residential mortgage, despite this being the most significant financial commitment over many years for most borrowers.” 

While mortgage brokers play an intrinsic part in finding an appropriate home loan for borrowers, the report did not cover how brokers provide competition, convenience or clarity to borrowers. Instead, the report touched on brokers only briefly, and this was largely in relation to how smaller lenders rely on the third-party channel for distribution.

Existing borrowers could pay tens of thousands of dollars more

However, the inquiry found that the negative attention on the banks from the royal commission, the Productivity Commission’s inquiry into competition in the financial system and the ACCC’s interim report on residential mortgage prices had prompted some borrowers to review the prices they were paying for their residential mortgages.

For example, in the quarter ending 30 June 2017, 88,000 residential mortgages received a price reduction, while in the final quarter of the monitoring period (ending 30 June 2018), just over 144,000 residential mortgages received a price reduction.

In all, about 11 per cent of borrowers with variable rate mortgages had the price of their current residential mortgage reduced by one of the five banks under review in the year to 30 June 2018.

Despite this, the rate of borrowers switching lenders remained low, less than 4 per cent of variable rate residential mortgages with the inquiry banks’ main brands refinanced to another lender in year to 30 June 2018.

Further, the ACCC found that new borrowers were often given higher discounts than existing borrowers, with the average new borrower achieving a discount of up to 32 basis points, as at 30 June 2018.

“An existing borrower with an average-sized residential mortgage who negotiated to pay the same interest rate as the average new borrower from 30 June 2018 could initially save up to $850 a year in interest (depending on the category of residential mortgage).

“For existing borrowers with a larger than average residential mortgage, the savings from a 32 basis point reduction in the interest rate they pay could add up to tens of thousands of dollars over the full term of their residential mortgage in net present value terms,” the report reads. 

Calls for borrowers to ask for discount, new pricing calculator to be launched

“I encourage more people to ask their lender whether they are getting the lowest possible interest rates for their residential mortgage and, as they do so, be ready to threaten to switch to another lender,” Mr Sims therefore commented.

“I am afraid that the threat of switching banks will often be necessary to achieve a competitive mortgage rate.”

Speaking following the release of the report, Treasurer Josh Frydenberg noted that the report backs the recommendation from the Productivity Commission’s inquiry into Competition in the Australian Financial System, which called for the development of an online calculator that reports on actual interest rates paid and discounts received by different types of borrowers.

“The government strongly supports the objective of this recommendation and has asked the Council of Financial Regulators to accelerate the development of options for its implementation,” he said.

“Improving customer outcomes and increasing competition in the banking sector is part of the coalition’s plan for a stronger economy.”

Mr Frydenberg continued: “The ACCC’s findings add further weight to the important actions the Coalition government is taking to improve competition and transparency in the residential mortgage market.

“Our open banking reforms will revolutionise the ability of consumers to shop around for a better deal. By giving individuals access to personal data currently held by their bank, they will be able to better compare prices and switch between products and providers.” 

While the ACCC has not made any sweeping recommendations to government, it has noted that the new Consumer Data Right will, among other things, make it much easier for consumers to compare available interest rates.

“The ACCC looks, in particular, to the Consumer Data Right to empower consumers in their dealings with banks,” ACCC chair Mr Sims said.

[Related: ACCC releases mortgage pricing report]