In December, the government released the final report from the Australian Competition and Consumer Commission’s Home Loan Price Inquiry, which examined how the home loan market works and potential improvements that could be made. Annie Kane reviews the key findings and recommendations.
Back in October 2019, the Treasurer Josh Frydenberg directed the Australian Competition and Consumer Commission (ACCC) to conduct an inquiry into home loan pricing after noting that the banks had failed to pass on to mortgage customers the RBA’s full 25-basis-point cash rate reduction.
As such, the Treasurer specifically tasked the ACCC to consider two issues: prices charged for home loans since 1 January 2019, and impediments to borrowers switching to alternative lenders.
An interim report was released in April 2020, with a final report, released in December, which found that a lack of price transparency and higher interest rates for existing loans continued to persevere in the lending landscape and that the difficulty in changing loans were preventing borrowers from doing so.
Given the barriers to transparency and switching, the ACCC recommended that four key actions be taken to improve the mortgage process for customers (although it noted that reforms are already underway to assist borrowers in switching between lenders or home loan products, for example via the Consumer Data Right).
1. A prompt for variable rate borrowers
The ACCC found that, as at September 2020, borrowers with home loans between three-five years old paid, on average, about 58 basis points more than the average interest rate paid for new loans.
Further, it found that borrowers with loans more than 10 years old were, on average, paying approximately 104 basis points more than the average interest rate paid for new loans.
For example, it outlined that a borrower with a home loan of $250,000 could save more than $1,400 in interest in the first year by switching to a loan with the lower, average interest rate paid for new loans. Over the remaining term of the loan, that borrower could save more than $17,000 in interest.
As such, the ACCC recommended that all lenders should be required to provide borrowers with variable rate loans originated three or more years ago with an annual prompt to encourage borrowers to engage in the home loan market to see if they could benefit from switching lenders or home loan products.
This prompt should encourage customers to contact their existing lender to ask for a better rate and “also encourage borrowers to contact their mortgage broker”.
The ACCC also suggested that consumer testing and trials should be undertaken to determine the “optimal design” of the prompt; however, it suggested that it should:
The report found that the discharge process can be “unnecessarily difficult and lengthy for borrowers” and often involve “unclear and/or complicated steps for borrowers, such as being difficult to access and complete, or having administrative hurdles such as lenders requiring in-person contact before processing a discharge request”.
Indeed, the commission added that borrowers can be uncertain about how long the discharge process will take and that there are unnecessary delays in the process (including through the use of retention strategies by existing lenders).
Further, it warned that pain points in the discharge process “impede switching and result in costs to market participants more generally, including lenders, mortgage brokers and borrowers”.
As such, it recommended that all lenders should be required to provide a standardised Discharge Authority form to borrowers to complete and allow for “appropriately authorised third parties” (for example, a settlement agent, mortgage broker or new lender) to complete and submit discharge forms on borrowers’ behalf.
“The form should be easy to access, fill out and submit. Lenders should adopt an identical standard form template, rather than agreeing to common criteria and continuing to design their own forms, which would still potentially allow them to add fields or make forms unnecessarily complex,” the report reads.
According to the ACCC, the form should only request details from the borrower that are necessary for their discharge request to be processed.
It suggested that the design and implementation of the form would require further consultation with industry and regulators.
As well as a standardised form, the report recommended that all lenders should be subject to a maximum time limit of 10 business days to complete the discharge process. This would cover the period from when the borrower (or a third party acting on their behalf) submits the Discharge Authority form to when the existing lender is ready to begin the settlement process.
“While stakeholder consultation has indicated that 10 business days is an appropriate time period for processing discharge requests, further stakeholder consultation will be required on the appropriate time limit,” the report reads.
This consultation could also focus on:
Lastly, the inquiry concluded that the ACCC should “continue to inquire into and monitor competition and pricing in the home loan market, under government direction”.
This new inquiry would focus on the 10 largest lenders in the home loan market and consider other lenders or groups of lenders (such as non-ADIs) as competition issues are identified that involve or impact those lenders.
It proffered: “In undertaking this role, the ACCC should consider the following matters:
The ACCC said it should report its findings to the Treasurer annually over a five-year period, providing its first report to the Treasurer by 30 September 2022.
The government has said that it “will consider the report and respond in due course”.
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.
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