Borrowers 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?
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.
Recently I was reading an article from http://banking-and-financial-services.news.top4.com.au/ about mortgage brokers and the headline was “4 Things Your Mortgage Broker Will Never Tell You” and it went something like this; Please note; The maroon writing are my own personal comments.
Are you on the hunt for a home loan and considering recruiting the help of a mortgage broker? While mortgage brokers can be a great resource if you have a more complicated home loan or need a little mortgage advice, before you go down this road it’s important to know exactly what you’re signing up for.
So to help you decide, we’ve called on Mozo’s property expert Steve Jovcevski to reveal the common things a broker will never let you in on:
‘Of course Steve Jovcevski is going to be totally unbiased, right?’
1. Brokers don’t compare the entire market
Most brokers use an aggregator, which is a third party who has the accreditation to deal with the lender on the broker’s behalf.
Steve explains, “these aggregators only compare a select number of providers and home loan packages, which means when you use a broker you won’t have access to the entire home loan market and the lowest rates in the market.”
Smaller lenders offering super low rates often aren’t found on broker panels because they can’t afford to pay the commissions.
‘This can be true in some instances, except the part about the commissions. When a broker submits a customer’s loan application to a lender they virtually do so on a platter. In other words the broker has used their capital resources to bring the customer to the bank; the bank has had no capital outlay in recruiting that customer.
Also, many of these small lenders can be mortgage managers. In other words they are not strictly lenders in the true sense. They are acting on behalf of a money wholesaler who in actuality’ will be holding the title for your property as security. If the mortgage manager goes out of business the loan will revert back to to the wholesaler who might sell your loan off to the highest bidder.’
2. Brokers receive a higher commission for recommending certain home loans
If you sign up with a home loan through a broker they will get paid a commission by the lender, which is a percentage of your loan amount. According to Steve, lenders often run a “commission special”, which means the broker will be paid a higher percentage of the loan amount if they recommend that product to a customer.
While brokers must reveal the commission they receive in the loan doc, they won’t reveal which lenders are offering the biggest commission percentages of the loan amount. “This drives broker behaviour, as the lenders that pay a higher commission percentage often receive the most leads from the broker,” says Steve.
‘In the main this is not true, brokers look to cultivate long term relationships with their customers, because they realise that some fish grow into big fish. If your butcher keeps selling you tainted meat you’re going to find another butcher. If you buy a car from one dealer and then later find that same car at another dealer for $5,000 less there’s a big chance you’ll never go back to the dealer who sold you the car in the first place.
The facts are smart brokers negotiate with lenders to get the very best interest rate they can for their customers in order to consolidate the relationship they have with their customers.
Additionally, there is very little variation in the commissions most lenders pay anyway, with the exception of specialist lenders who cater to alternative loans such as loans for bad credit loans applicants.’
3. Brokers are not property experts
While mortgage brokers can help you decide on the home loan you’ll go for, Steve says it’s important to remember that they are not experts when it comes to providing you with advice about the type of property you should go for or the tax deductions available to you.
“For this type of information, you will need to speak to a financial advisor or tax accountant that specialises in property.”
‘So what, you probably never went to the broker to get property advice in the first place, they’re home loan experts not real estate agents.’
4. You can do it yourself
Since brokers only have a number of home loans that they offer to their clients, they will generally not reveal what the best interest rate in the market is. “To find this out, home loan borrowers need to search the home loan market themselves,” advises Steve.
‘Of course you can do it all yourself, but why are mortgage brokers so popular these days? Why are they now writing 55% of all the home loans in Australia today? Primarily they save their customers time and money. They do all the hard yards of finding the lenders best rates that aren’t advertised on any web site. They will save you time by accurately knowing what documents are required with any given lender and once the application is submitted work on pushing it through the bureaucratic banking system. While all this is happening you can lean back and enjoy your cappuccino.’
Rather than spending hours visiting each lender’s website, use a reputable home loan comparison website like Mozo.com.au to compare home loans side by side and find out which lenders are offering the best home loan rates.
Mozo compares more than 550 home loans from banks, non-bank lenders, credit unions and building societies to help you find the best value loan for your needs.
Pretty slick article don’t you think?
Now you shoot over to his website and what do you find, a comparison website selling anything and everything financial, including home loans. How do they work? Well it’s very clever, you see a lender you like and you click on the button that says ‘Go to Site’ and lo and behold you have to fill in all your personal details.
What happens next? You guessed it you get a call from a telemarketer, but you knew that was coming, right?
So, Steve Jovcevski, how do you make your money? That’s a pretty expensive web site you have there.
The bottom line is, mortgage brokers need your support as they have been the major reason that competition is now so keen between lenders. There’s a number of good reasons as to why they are so popular, but the bottom line is they look after their customers and they do a good job.
Existing and would be investment property investors and homeowners have been stung in recent months with increased interest rates for both investment and owner occupied loans. Most are wondering, what’s really going on?
The reality is that loans for investment properties overheated in the Sydney and Melbourne property markets, so APRA (Australian Prudential Regulatory Authority) stepped in and told lenders to cool it.
Apparently, their rule is that lenders are not allowed to let investment property lending exceed growth of more than 10% per year. It appears that a number of banks had breached that threshold and were warned to rein it in.
Banks Stretch the Limits of Incredulity
Additionally, the banks were told that they needed to increase their cash reserves in order to reduce their risk exposure in the overheated property market. What does that mean? Simply they needed to find extra cash from somewhere to bolster those cash reserves. Of course, they went to their shareholders to achieve that didn’t they?
No they didn’t, why should they, when they could just simply shoot sitting ducks in the barrel? The banks simply put out a few press releases, bemoaning how ‘hard done by’ they were and increased the interest rates on all their existing customers. In some instances not only those with investment property loans, but owner occupier loans also.
My take on that is, they should have gone to their shareholders. Because, now the customer is subsidising the cash reserve increase, are the banks going to refund that money when and if those inflated cash reserves are no longer required? I don’t think so!
How Much Money are They Making?
Prior to the Global Financial Crisis lenders existed on margins of 1.5% and sometimes a little less. The property market was reasonably flat, especially in Sydney and Melbourne. The mortgage market was extremely competitive. In fact we all know if you could have ‘fogged up a mirror’ there was a lender out there ready, willing and able to give you money. Of course that kind of loose monetary environment couldn’t last forever, so it eventually came to a crashing holt.
However, during that time banks have become extremely clever. First, the regulators banned banks from charging exit fees on loans. What did the banks do? They increased interest rates outside of the normal RBA wholesale cycle. Westpac was the first one to try that on and got away with it. Was there a huge exodus of customers from Westpac. Not a chance, most of their customers went along with it with only a slight whimper.
To that end, the four major banks are now enjoying substantially increased margins on all of their home loans.
Are the Banks Guilty of Bait and Switch Tactics?
One thing we can all be sure of is that lenders might give with the one hand, but will always try to find a way to take it back with the other hand. It should be obvious to most by now that the name of the game with banks is to continuously increase their profits. Hence, we have seen ever increasing record profits declared by the banks over the last few years. So, I would suggest to you to expect more of the same in the coming years.
The other important point that some lenders have been accused of lately is, luring customers in with low interest rates and then increasing those rates outside of normal RBA rate cycle changes. Where are the regulators when this stuff happens (out to lunch I guess)?
So, it’s extremely important to thoroughly research the integrity of the lender you are considering going with in regards to their trust level. It doesn’t matter whether you’re going for a new loan to purchase a property or refinancing an existing loan.
What You Should Know About Current Interest Rates
The current interest rate landscape has changed considerably in recent times to the extent that there are different interest rate levels for the same loan. For example, if you are applying for an owner occupied loan your interest rate with some lenders could be higher should you choose to make the loan ‘interest only’, as opposed to paying principal and interest. The same can apply for investment property loans.
What the rationale is for doing that I don’t know. But being a natural cynic, I can’t for the life of me see how the banks can justify doing that. Other than it’s another way to increase their profits. If you’re trying to slow down investors from taking out investment property loans, why put up interest rates at all. My take on it is, it would be just as effective to reduce the Loan to Value Ratio on investment loans.
Is it Time to Fix? Even though it’s difficult to predict interest rate movements there are some tempting 3 year fixed interest rates around at the moment. Currently on notable lender is still offering 3.99% for an interest only investment property loan.
Currently Australia is experiencing a two speed economy (no not that one), slow and slower is what it is at the moment. The Aussie dollar is edging back up as did unemployment slightly. My guess is that interest rates will probably stay pretty much where they’re at until after the coming election.
The property markets in both Sydney and Melbourne did slow down a bit over Christmas and just after for a few weeks. However, the property markets now showing that they still have a little bit of steam left in them. So, while that’s going on I don’t see the RBA reducing rates any further.
Should you be in the market for considering home loan options, give us a call and we will be happy to help you explore your possibilities.
Bio: 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.