Savings contested on credit union loans

The controversy around the realistic savings available to borrowers using a credit union for a home loan continues to fester, with the Australian Banker's Association now asking ASIC to decide whether credit union advertising is misleading.

 Current television advertising coordinated by Abacus, the credit union industry lobby, states that credit unions are "a place where Infochoice says you could save over $35,000 on a home loan."

Steve Munchenberg, chief executive of the ABA, said he had written to ASIC in the last couple of days on the back of legal advice that indicated "the ads are likely to be misleading for the purposes of the ASIC Act."

"The [$35,000] claim is based on taking the four best credit union rates in the country on a particular day, comparing those with the four big bank's headline standard variable rates on that day and extrapolating that across the life of the mortgage."

"Apart from the fact that many borrowers don't pay the headline rate - they get a discounted rate - you can't take a snapshot from a particular day and extrapolate that over 30 years."

The Infochoice comparison was made on March 9,  a week after the RBA raised rates by 25 basis points.

 The big four banks followed the central bank with 0.25 per cent rate hikes which became effective on March 5, taking the big four SVR range to 6.74 - 7.01 per cent.

The most competitive credit unions and building societies made their 25bp rate rises effective on March 10 or later, leaving their rates in the range of 6.25 - 6.3 per cent on March 9.

The Infochoice comparison for March 9 artificially inflated the ongoing interest rate gap between the big four banks and the credit unions by 0.25 per cent, said Steven Anderson, a financial researcher from rival financial comparison service GBST.

"The only reason you do the comparison on the March 9 is because it makes you good," said Anderson. "I really wouldn't be surprised if this was all staged."

 "Credit unions often move their rates a few days or a week after the banks, who are usually quick to raise rates after an RBA announcement, so that's not a surprise and I don't know which four credit unions Infochoice used, but I suspect it was four pretty weird and wonderful little ones somewhere and yes - it looks staged to me."

Among the most competitive standard variable credit union mortgage rates on March 9 were Heritage Building Society 6.3 per cent, raised to 6.55 per cent on March 10, and Hume Building Society with 6.25 per cent, raised to 6.5 per cent on the same day.

Others in the most competitive credit union group are Victoria Teachers Credit Union, which had its standard variable set at 6.25 per cent on March 9. They went up to 6.5 per cent on March 15.  mecu also went up on the same day from 6.3 to 6.55 per cent.

Shaun Cornelius, CEO of Infochoice, said he would not reveal the names of the credit unions used in the research but could confirm that they were "the four most competitive credit union mortgages at that point in time."

"Absolutely we stand by our research, we have a very robust methodology for this study," said Cornelius.

"If we did it on another day the results might be slightly up or down but essentially the same.

"The ABA is upset because our research doesn't cast a very positive light on its members," said Cornelius.

"If a big four customer moved to a cheaper credit union, the reality is they would probably move to one of the four most competitive credit unions and if you compare the four most competitive credit unions with the big four banks you get those savings."

 Louise Petschler, chief executive of Abacus, said the organisation was standing by the Infochoice research in its advertising and did not choose the March 9 date in order to maximise the claimed savings.

"I am confident that if we run the comparison on any other day the savings will be about that figure."

Steve Anderson said the savings on offer from credit unions were less.

 "Taking into account the significant customer discounts on offer, and some credit unions have discounted rates and fees as well, I think the realistic savings are no more than about $10,000, on March 9; and they are negligible in most scenarios or in some cases even negative."

 The Abacus/Infochoice research used headline-advertised interest rates and excluded fees and charges.

"Yes, there are a lot of things that we could include but we say this is a comparison between the advertised rates of the banks and the credit unions," said Cornelius.

"And we have been saying for a long while now that there are big savings on offer from credit unions and obviously some people don't like hearing that."

Including fees and charges in the mortgage comparison would favour credit unions even more, said Louise Petschler.

"The potential savings were higher if you compared our fees and charges versus the banks, but we didn't include that because things can change over such a long time. We chose just to compare headline interest rates."

The maximum savings on offer over thirty years for a big four customer who wants to switch to online lender State Custodians is $22,000, said Damian Smith, the chief executive of another rival financial comparison service, Ratecity.

Smith said he doubted the effectiveness of the credit union claims because borrowers only think three years ahead, not over the twenty-five or thirty years of a mortgage.

"Potential borrowers manage their household finances like a business, and cash flow is king," said Smith.

"They work out their income and repayments over this year, next year and 2012 maybe."