The Australian Competition and Consumer Commission has detected “signs of oligopoly behaviour and a lack of vigorous price competition” among the big banks in the home loan market.
The ACCC has released the interim report of its home loan price inquiry, reporting that “when setting variable interest rates the big four banks were often accommodative and focused on each other, giving little regard to small lenders.
“Comparatively, other banks employed a more diverse approach to pricing.”
The interim report was based on a review of the major banks’ mortgage pricing between January and October last year. The ACCC reviewed internal bank documents, which reveal their considerations when they made rate changes.
The banks’ key consideration was maintaining profitability. The banks preferred not to reduce deposit rates that were approaching zero for a range of reasons. They aimed to at least partly recover their anticipated profit reductions on deposits through their headline mortgage rate decisions.
“The big four banks considered community expectations and the public’s reaction when making their headline variable rate decisions. This resulted in some of the banks reducing their variable rates by more than they otherwise would have,” the ACCC said.
“We did not see evidence of the banks aiming to match the headline variable rates of lenders other than their big four peers.”
“We found that the banks’ changes to headline variable rates were not fully aligned with changes in their cost of funds.”
The report highlights a lack of price transparency and the tendency for lower interest rates to apply on new loans compared with existing loans.
“This will have tempered the benefit to some consumers of falling interest rates,” the ACCC said.
Headline variable rates have not been an accurate indicator of what home loan customers actually pay or what consumers should expect to pay. That is because the majority receive discounts off the headline rate.
In October last year, the gap between the headline variable rate and the average rate paid on standard owner-occupier principal and interest loans ranged from 123 to 131 basis points among the Big Four.
Over the course of 2019 the gap widened. By October 13 per cent of borrowers received a discount of 150 bps from a Big Four lender. At the same time, 11 per cent of Big Four borrowers received no discount.
The discounts include advertised and discretionary reductions, making it unnecessarily difficult and costly for customers to discover the best price offers.
Access to the consumer data right will improve consumers’ ability to compare and switch between lenders and products.
At the end of September, customers with new owner-occupier P&I mortgages were paying 26 bps less on average than customers with existing loans.
The older the loan the more significant the gap. Borrowers with loans that were greater than five years old were paying 40 bps more on average than a borrower with a new loan.