90 Marine Terrace Fremantle, WA, 6160

The Longer You Stay, the More You Pay

The following extract is taken from pages 8 and 9 of the ACCC (Australian Competition and Consumer Commission) Home Loan Price Enquiry – interim report, March 2020.

This makes for some pretty eye-opening reading, and is just the opening couple of pages. If you want to nerd out on this, the full report is available here.

Interest Rates Paid by Home Loan Customers

There are two components that determine the interest rate a home loan customer pays: the headline interest rate and discounts off that headline interest rate. Reductions in headline variable interest rates following cuts to the cash rate and increasing discounts drove a reduction in the average interest rates paid on variable rate home loans over the price monitoring period. However, a lack of price transparency and the tendency for lower interest rates to apply on new loans compared to existing loans will have tempered the benefit to some consumers from falling interest rates.

A lack of price transparency makes it difficult for consumers to compare home loans

There has been little difference in the headline variable rates of the big four banks. In any event, headline variable rates have not been an accurate indicator of what most home loan customers of these banks actually pay, or what most consumers should expect to pay. This is because the overwhelming majority (close to 90 per cent) of the big four banks’ home loan customers receive discounts off the headline variable rate. For many customers, these include both advertised discounts and discretionary discounts. For example, as at 31 October 2019, the gap between the headline variable rate and the average interest rate paid on standard owner-occupier loans with principal and interest repayments across the big four banks ranged from 123 to 131 basis points.

This gap between headline variable rates and the average interest rates paid by customers increased for each of the big four banks between 30 September 2018 and 31 October 2019. This widening of the gap was due, in part, to a large increase in the number of big four bank customers that received a discount of 150 basis points or more off the headline variable rate. As at 31 October 2019, around 13 per cent of the big four banks’ customers received a discount of 150 basis points or more off the headline variable rate, while around 11 per cent received no discount off the headline variable rate.

Discounts lead to big differences in what customers pay for their home loans. If a customer with no discount was able to obtain the average discount of 128 basis points (the average discount for owner-occupier loans with principal and interest repayments with the big four banks), for example by asking their bank for a lower rate, refinancing to another home loan or switching lenders, this could result in interest savings of nearly $5 000 in the first year alone for an average sized new loan of $386 000.

The discount received by many home loan customers includes both advertised discounts and discretionary discounts. Discretionary discounts are offered on a case-by-case basis to individual customers, usually after the lender has assessed their application. The lack of transparency in discretionary discounts makes it unnecessarily difficult and more costly for consumers to discover the best price offers.2 However, consumers will soon have access to the Consumer Data Right which will improve their ability to compare and switch between home loan products and lenders.

We also note that one of the big four banks offered higher advertised discounts in the second half of 2019, in order to improve the transparency of discounts and reduce its reliance on discretionary discounts.

Loyalty can cost existing customers

The big four banks’ focus on attracting new home loan customers with increasingly large discounts over time has created a difference between the average interest rates paid for new loans compared to existing loans. As at 30 September 2019, customers with new owner−occupier loans with principal and interest repayments were paying, on average, 26 basis points less than customers with existing loans.

In most cases, the average difference is even more significant for customers with older loans. For example, as at 30 September 2019, the big four banks’ customers whose existing owner-occupier loans with principal and interest repayments were greater than five years old were, on average, paying 40 basis points above what the big four banks’ customers with new loans were paying. If one of those customers with an existing loan of around $200 000 (the approximate average size for those loans greater than five years old) had refinanced to obtain a new loan rate at one of the big four banks at that time, they could have saved around $850 in interest the first year.

The difference between average interest rates paid by customers with new loans and customers with existing loans persists, in part, because price reductions for customers with existing loans are not always as large as discounts on new loans. This demonstrates the importance of home loan customers shopping around and asking about available discounts.

Guidance for consumers

We encourage consumers to shop around when looking for a home loan and to negotiate with lenders. Even a small reduction in interest rates can potentially save a consumer thousands of dollars over the life of their loan. While not all lenders offer discounts, and not all consumers will be eligible for a discount, consumers willing to ask for a better rate can often obtain an additional discount to that advertised by lenders; these additional discounts are known as discretionary discounts.

Customers with existing home loans should review their loan on a regular basis, and ask their lender for a better deal. Some customers with an existing loan may need to switch to another home loan product with their lender, or switch to another lender, to get the best deal available to them.

Yeah…. That’s what I’ve been saying for freakin’ years.

Book a call with me now to see if refinancing is right for you.

Brodie Brown

Professional Mortgage Broker