Home loan customers aren't told about available discounts and it's costing them more than $3800 in their first year on the average mortgage.
Meanwhile, longtime customers are spending $1200 more in their first year compared to new customers joining a bank.
These are the startling findings from the Australian Competition and
Consumer Commission's (ACCC) 10-month inquiry into the residential
mortgage market, where it examined the motivations, influences and
processes behind the big banks' pricing decisions.
The inquiry looked at how Commonwealth Bank, Macquarie Bank, ANZ, St George
and NAB calculate pricing for their residential mortgages during the two-year period until 30 June 2017. Combined, the five banks hold 84% of the
outstanding mortgage market, which is valued at $1.3 trillion.
The costs pile up
The interim report – released as royal commission hearings investigate the
banking sector – found shoppers pay about $230 extra a month on the
average residential loan because they can't factor in the discounts
offered at the discretion of lenders.
"The discounting by the big banks lacks transparency and it's almost
impossible for customers to obtain accurate interest rate comparisons
without investing a great deal of time and effort," says Rod Sims, chair of
"But the potential savings from these discounts are immense," he adds.
A borrower with an average residential mortgage of $375,000, who's paying
off both its principal and interest, would save an estimated $3863 in
interest over the loan's first year. This is because lenders could offer
loans between 78 and 139 basis points below an advertised interest rate.
But the potential savings aren't shared with the people shopping for a home loan, hindering their ability to make an informed decision on what for many is the most expensive purchase in their lifetime.
The expense of 'no frills' loans
The value of other home loan products were hidden by a smokescreen of
confusing interest rates, fees and one-off charges, the ACCC says.
Basic or no frills loans end up being more expensive than other loan products.
"Once discounts are factored in, the average interest rate actually paid by
existing borrowers on basic loans ... has often been higher than the average
rates paid by existing standard variable loan borrowers," the ACCC report
"We consider it to be doubtful that this would accord with most borrowers'
No rewards for being loyal
Longtime banking customers were being offered less competitive rates on
variable interest mortgages than new customers.
"It seems existing customers are not being rewarded for their loyalty; in
fact they are worse off," says Sims.
On a $375,000 residential mortgage, a new borrower paying an interest rate
that was 32 basis points lower would save approximately $1200 in interest
over the first year of a loan.
"These findings suggest that many bank customers would likely benefit from
either switching mortgage providers, or approaching their bank for a better
rate and indicating they are prepared to switch to get one," says Sims.
The ACCC inquiry was launched in May 2017, upon Treasurer Scott Morrison
announcing the big five banks would be taxed $6 billion under the Major
Bank Levy. A final report is expected to be delivered on 30 June 2018.