Echoing the findings of a Reserve Bank report earlier this year, the Australian Competition and Consumer Commission has found that home loan borrowers with older loans pay significantly higher rates than borrowers with newer loans – a loyalty penalty. It wants lenders to prompt borrowers to review their loans.
“Many borrowers could save money by seeking a lower rate from their existing lender or switching to a new lender,” the ACCC said in the final report of its Home Loan Price Inquiry, which was released on Saturday.
The regulator has recommended that lenders be required to regularly prompt borrowers whose loans are older than three years to review their current interest rate and consider the potential benefits of switching products or lenders.
The prompt should bring the potential benefits of switching to the borrower’s attention “in a compelling and personalised way”. It should include a comparison between the borrower’s current interest rate and the average interest rate paid by borrowers with similar new home loans across the market.
It said: “The fact that many borrowers with older home loans continue to pay interest rates significantly higher than those available on new loans indicates a lack of engagement in the home loan market among this cohort.”
The ACCC said factors standing in the way of borrowers switching include a lack of clear and transparent pricing, inconvenience and time costs. “At each stage in the switching process borrowers face challenges or frictions,” it said.
It has also recommended that lenders be required to provide a standardised discharge authority form to borrowers, which should be easy to access, complete and submit.
Borrowers with home loans between three and five years old paid an average of 58 basis points more than the average rate on new loans (the data was collected in September).
As loans age the gap widens. Borrowers with loans more than 10 years old were paying an average of 104 bps more than the average rate on new loan.
In February, the RBA reported that loans in its data set that were four or more years old had rates that were 40 bps higher on average than new loans.
The RBA said some of the difference can be explained by changes to the types of loans that are sold. For example, the share of interest-only and investor loans, which tend to have higher rates, has declined in recent years.
But even when the RBA compared loan types that were the same, older mortgages still tended to have higher rates than new loans.
The discounts lenders offer on their advertised standard variable rates have been widening over the years, from an average of around 100 basis points in 2015 to more than 150 bps last year. The RBA confirmed that banks compete for business by increasing the discounts for new and refinance borrowers, rather than lowering rates overall.
Both the ACCC and RBA concluded that the savings borrowers with older loans could make by switching are material.