Treasury calls for ‘greater transparency’ in home loans

The report was commissioned following criticism of the banks from Treasurer Josh Frydenberg for their failure to pass on the RBA’s full 25 basis point cuts to the cash rate in October 2019.

The newly released interim report considered how the banks treated the RBA’s rate cuts in June, July and October 2019 and found that “maintaining profits was a major consideration for the big four banks as they weighed whether to reduce mortgage rates in line with Reserve Bank of Australia cash rate cuts during 2019”.

Further, the report found that a lack of price transparency and higher interest rates for existing loans continued to cost customers.

For example, at the end of September, customers with new owner-occupier loans with principal and interest repayments were paying, on average, 26 basis points less than customers with existing loans. The difference was usually even more significant for customers with older loans, with customers who have had their loan for more than five years paying 40 basis points (0.40 per cent) above the price on newer loans.

The ACCC also found that home loan pricing practices continue to make it difficult for consumers to compare different mortgage products.

Speaking after its release, Mr Frydenberg and Assistant Treasurer Michael Sukkar outlined that while the inquiry was commissioned by government to “ensure the pricing practices of Australia’s financial institutions are better understood and made more transparent”, the findings showed that transparency was still not the norm.

In a joint statement, the Treasurer and Assistant Treasurer commented: “In relation to standard variable interest rates (SVRs) offered by the major banks, the ACCC found an overall lack of price transparency, particularly for new loans, making it difficult for customers to compare home loans.

“Specifically, the ACCC found that the SVR is not an accurate indicator of the actual prices paid by major bank customers, with the overwhelming majority (around 90 per cent) receiving an average 128 basis point (1.28 per cent) discount off the SVR. For the average mortgage-holder, this discount represents a saving of nearly $5,000 in the first year alone.”

They continued: “The report also makes clear that banks do not proactively reduce the SVR when their overall cost of funds come down. Instead, banks typically only announce a reduction in the SVR when the RBA announces a reduction in the cash rate – notwithstanding that the cash rate only represents a part of their overall funding costs.”

The Treasury said that the ACCC’s interim report findings therefore “underline the importance of greater transparency and competition in the sector and need for customers to remain highly engaged and shop around to get access to the best deal – including from their existing financial institution”.

The joint statement continued: “The findings also underscore the government’s continued commitment to a number of major reforms to increase competition across the banking industry, including implementation of the Consumer Data Right, which will empower consumers to more easily compare and switch between home loan products and lenders.”

It is expected that the ACCC final report will examine the impediments consumers face when switching lenders and will provide recommendations focused on driving further competition in the home loan market.

In light of the coronavirus pandemic, the government has said that it will extend the time frame for the inquiry’s final report until 30 November 2020.

[Related: Profit stopped banks from passing on full rate cuts: ACCC]