How Much Are The Big Banks Ripping You Off For?

Banks’ Unclear Pricing Costing Frustrated Borrowers Thousands


mortgage broker sydneyBorrowers who don’t shop around due to the banks’ unclear pricing tactics are losing out on an average of $850 a year, an ACCC report has found.

Get a load of this: there’s this tactic that the big four banks (ANZ, CBA, NAB and Westpac) use that makes it “difficult” and “frustrating” for borrowers to discover their best home loan offer.

The tactic is called discretionary pricing, and the Australian Competition and Consumer Commission (ACCC) has just released a scathing report on it.

So what is discretionary pricing?

The banks don’t really advertise their best home loan deals. But there are two kinds of discounts that they do offer.

The first is their “advertised discounts”, which are generally published on their website and relatively easy for borrowers to discover.

The second is “discretionary discounts”, which are much harder to find.

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

However, the criteria for discretionary discounts is generally not disclosed to borrowers.

So what’s the problem?

Basically, the banks are intentionally making it pretty damn hard and time-consuming for borrowers to obtain accurate lowest interest rate offers from multiple lenders.

In doing so, they’re hoping you’ll just get too frustrated and put the whole ‘searching around for a better deal’ thing in the too-hard-basket.

The ACCC says that’s how it was for 70% of recent borrowers from one bank – they obtained just one quote before taking out their residential mortgage.

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

“This adversely impacts borrowers’ willingness to shop around, either for a new residential mortgage or when they are contemplating switching their existing residential mortgage to another lender. The unnecessarily high cost that prospective borrowers incur to discover price information from lenders causes inefficiency.”

How effective is this tactic?

Extremely so.

The rate of borrowers switching lenders remained extremely low last financial year.

In fact, less than 4% of borrowers with variable rate residential mortgages with the top five banks refinanced to another lender, says the ACCC.

That’s just 1 in every 25 mortgages.

(It’s also worth noting that only 11% of people got a better home loan deal from their current bank by either asking for it or being offered it.)

“The big four banks profit from the suppression of borrower incentives to shop around and lack strong incentives to make prices more transparent,” says the ACCC.

How much are these opaque tactics costing some borrowers?

In two words: A lot.

The ACCC believes an existing borrower with an average-sized residential mortgage who negotiates to pay the same interest rate as the average new borrower could initially save up to $850 a year in interest.

“This could add up to tens of thousands of dollars over the full term of their residential mortgage in net present value terms,” the ACCC adds.

So will the banks stop doing it?

Unlikely. Well, anytime soon that is. Here’s what the ACCC say about it:

“At least one Inquiry Bank appears to be aware of borrower frustration with discretionary pricing. There is little evidence of any Inquiry Bank responding to that frustration by moving away from the practice,” the ACCC says.

“More generally, the Inquiry Banks, particularly the big four banks, 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.”

So what can I do about it then?

That’s the easy part. Get in touch with us to discuss your refinancing and/or renegotiating options.

By teaming up with us, not only can you save yourself the headache of having to research what each lender’s best available discount is, we will happily negotiate for it on your behalf.

So if you’re interested in potentially cutting down the amount of interest you pay each year, give us a call today.

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Banks Rip Off Investors

Australia’s Largest Lenders Decided To Charge More From Real Estate Investors And Profited $2.5 Billion

Home Owners aren’t off the Hook Either
 bank sign over entrance door of old style bank building in black and white sepia toneAustralia’s largest lenders have made an additional $2.5 billion simply from charging more for investors for their loans as compared to owner-occupiers. Financial institutions and banks are also keeping up with hammering both groups of consumers with hiking interest rates should they fail to look around for better deals.

Recent analysis provided by RateCity, a financial comparison website, shows that since the beginning of 2015, investors have seen not one but two distinct rate hikes that were definitively out of cycle. On the other hand, owner-occupiers only saw one such rate hike that was clearly out of cycle.

As a result, investors are spending more for their loans. Lenders to investors are now making more than they might have had they simply kept their rates in alignment with the Reserve Bank of Australia.

This is How Much Each Bank Made
RateCity was able to estimate the specific sums that particular institutions made starting from the beginning of 2015, and they did thisModern high rise bank building based on the interest rate changes of the banks as well as APRA home loan figures. The data indicates that Westpac saw an additional $750 million, while Commonwealth Bank netted an extra $740 million. $570 million fell into the hands of National Australia Bank, while $440 million wound up in the lap of Australia and New Zealand Banking Group.

The data and insights director of RateCity, Peter Arnold, has gone on record as to say that borrowers ought to be shrewd so they can find great deals on interest rates. He warns that investors can continue to pay more than owner-occupiers, but notes that a few lenders don’t charge investors as much as others. He advises a minimum of 20 percent equity in either loan case, so that a rate less than 4 percent can be had.

The Banks Reckoned they Could Afford it
real estate growth graph showing arrow across th etop of rising house pricesAustralian Finance Group’s general manager for sales and operations, Mark Hewitt, has pointed out that investor loan market rates are not as sensitive to pricing given that many investment costs can be written off as tax deductions.

Consider a 30-year home loan totaling $300,000. At the time of writing, owner-occupiers were facing an average rate of 5.27 percent, whereas investors were closing in averages around 5.51 percentage points. In practical terms regarding monthly repayments, that meant investors were paying $45 more, with $1705 monthly obligations instead of the $1660 owner-occupiers were facing.

Don’t Despair – Shop Around
Mortgage Choice’s head of corporate affairs, Jessica Darnbrough, claims that even though investors are getting hammered with higher interest rates throughout the marketplace that deals are still very low. She pointed out loans that clocked in at 3.7 percent for owner-occupiers and 3.9 percent for investors.

About About Dave Fleming

Dave is enthusiastic and fascinated by the digital and social media worlds. He is passionate and enjoys entrepreneurial pursuits, wealth creation financial strategies, health, fitness as well as cooking. Dave is the webmaster at www.mastermortgagebrokersydney.com.au, which is an information website pertaining to loans. He has a deep commitment towards writing about and helping people understand the basics of how the financial world works.