Hidden bank discounts could save home owners $3800

It's tough finding the best deal when you're not told about mortgage discounts.

  • Hidden mortgage discounts could save people tens-of-thousands
  • Loyal bank customers are being charged more than new customers
  • ACCC recommends people switch banks (or at least threaten to)

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 the ACCC.

"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.

How lenders calculate the discounts offered to borrowers: 
  • The borrower's risk profile 
  • The geographic location of the borrower or their residential property 
  • The borrower's value (or potential value) to the bank 
  • The bank's desire to write new business

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 says.

"We consider it to be doubtful that this would accord with most borrowers' expectations."

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.