A new report into mortgage pricing has shown that a lack of transparency is stifling competition, with the heads of the broker associations highlighting that this presents a prime “opportunity” for brokers to help borrowers.
The Australian Competition and Consumer Commission (ACCC) released the final report of its mortgage price inquiry on Tuesday (11 December), which monitored the prices charged by the five banks affected by the government’s major bank levy between 9 May 2017 and 30 June 2018.
The report was initiated by the commission after the Treasurer directed the body to inquire into prices charged by the financial institutions affected by the major bank levy (ANZ, CBA, NAB, Westpac and Macquarie Bank) to understand whether the costs of the levy were being passed on to borrowers.
While the ACCC did not find evidence that the five banks were changing prices specifically to cover the cost of the levy (whether in part or in full) over the monitoring period, it did find that the mortgage market was characterised by “opaque discretionary pricing practices” that cause “inefficiency” and “stifle price competition”.
ACCC chair Rod Sims said: “Pricing for mortgages is opaque and the big four banks have a lot of discretion. The banks profit from this, and it is against their interests to make pricing transparent.
“Borrowers may not be aware they can negotiate with their lender on price, both before and, particularly, after they have established their mortgage.”
A main finding of the ACCC report was that new borrowers pay lower interest rates than existing borrowers. According to the ACCC, new borrower loans were, on average, up to 32 basis points lower than existing borrower loans (depending on the category of residential mortgage).
This, it suggested, could be worth up to $1,000 per year for the average mortgage holder.
Mr Sims therefore urged “more people to ask their lender whether they are getting the lowest possible interest rates for their residential mortgage and, as they do so, be ready to threaten to switch to another lender”.
“I am afraid that the threat of switching banks will often be necessary to achieve a competitive mortgage rate,” he added.
While mortgage brokers play an intrinsic part in finding an appropriate home loan for borrowers, the report touched on brokers only briefly, and this was largely in relation to how smaller lenders rely on the third-party channel for distribution.
‘Brokers find consumers a better deal’: FBAA
Speaking to The Adviser following the release of the report, Peter White, managing director of the Finance Brokers Association of Australia (FBAA), argued that while he appreciated that the report was focused on “transparency of how interest rates are priced”, he said that the findings marked an “opportunity for brokers to highlight that this is what brokers do – finding consumers a better deal”.
Mr White told The Adviser: “I understand why mortgage brokers weren’t more profiled across the report because that is not how it was being positioned. Instead, it was looking at how the banks, and the majors in particular, actually create the pricing decisions on mortgages.
“But that said, the thing that I was surprised wasn’t mentioned that should have been is that this is one of the value-added propositions of mortgage broking.”
The FBAA MD elaborated: “Mortgage brokers are consistently helping clients to negotiate a better deal with their banks because they know that the banks do this. And when you can’t get a better deal or the loan is not suitable, then they look at refinancing options.”
Anecdotally, Mr White said that between 30 and 55 per cent of loans written by FBAA members were for renegotiation of a client’s loan with their existing bank.
He said: “This saves borrowers money, because they not only can achieve a lower interest rate, but they also don’t have the costs of having to move their loan, which can include costs for things such as mortgage insurance, new valuations, legal fees, etc.
“So, the mindset of the professional broker is to help clients get a better deal with the lender they are with. If that is not possible, then they are able to showcase the other options in the market place. This is part of the value proposition of brokers.”
Mr White concluded: “We see, once again, in the ACCC report that the banks are not being transparent about rates. And this was a theme that was raised in the royal commission, too.
“If you take the brokers out of the game, imagine how much worse it would be. Because we are the ones keeping the banks honest.”
‘In an economy devoid of mortgage brokers, most smaller lenders simply could not compete’: MFAA
The Mortgage & Finance Association of Australia (MFAA) also welcomed the report, specifically noting that the ACCC recognised the competition driven by smaller lenders, which is supported by the mortgage broking channel.
“As we have stated repeatedly in our responses to multiple regulatory reviews, from the ASIC Remuneration Review to this year’s royal commission, scrutiny on the financial services sector is entirely appropriate,” the MFAA said.
“It is also appropriate for the mortgage broking industry – we are now systemically important to the Australian economy, given that mortgage brokers now originate more than 55 per cent of all home loans in Australia.
“This is the reason the MFAA has supported industry reform and was instrumental in the formation of the Combined Industry Forum (CIF). The CIF has driven a broad range of reforms (in response to ASIC’s 2017 review), aimed at addressing potential conflicts which have allowed the industry to get ahead of the curve in seeking to continually improve the customer outcomes we are producing,” the association continued.
However, the MFAA said it was “critical that unintended consequences are considered before any regulatory change is implemented”.
The broker association highlighted a recent Deloitte Access Economics report, which found that the average broker earns $86,400 before tax, so “any significant reduction to commissions is likely to severely rationalise, if not decimate, the industry, as many brokers would not be able to continue to run their small businesses”.
“The result would be devastating for smaller lenders, and therefore catastrophic for competition, choice and access to credit for consumers, compounding the fact that credit has already been tightened due to a range of other factors,” the MFAA said.
It concluded: “The ACCC’s finding, that small lenders ‘are likely to be more vulnerable to future regulatory changes that affect the use of brokers as a distribution channel’, reflects exactly what the MFAA has been communicating to policymakers, Treasury, media and other stakeholders. In an economy devoid of mortgage brokers, most smaller lenders simply could not compete.
“With the smaller lenders removed, Australian consumers would be left with the choice of just a handful of lenders, or fewer if they live in a regional or rural area. This will lead inevitably to less competition, less choice and ultimately, higher prices, which would not be a good customer outcome at all.”
Annie Kane is the editor of The Adviser magazine, Australia’s leading magazine for mortgage brokers.
As well as writing news and features on the Australian mortgage market, financial regulation, fintechs and the wider lending market – Annie is also the host of the Elite Broker podcast and regulator contributor to the Mortgage Business Uncut podcast.
Before joining The Adviser team at Momentum Media in 2016, Annie wrote for a range of business and consumer titles, including The Guardian (Australia), BBC Music Magazine, Elle (Australia), BBC Countryfile, BBC Homes & Antiques, and Resource magazine.
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