'No frills' mortgages not always the cheapest, ACCC interim report finds

The Australian Competition and Consumer Commission’s (ACCC) interim report has placed banks under even greater pressure as it shows that customers find it more difficult to make informed choices due to opaque pricing of discounts offered on residential mortgage. The ACCC said that the big banks' home loans are not competitive, at the same time warning about “no frills” mortgages.

The average interest rates paid for basic or “no frills” loans are usually higher than standard loans at the same bank. "We think many customers who opted for basic or no frills loans thinking they are saving money would be surprised to learn they might actually be paying more," the ABC reports ACCC chairman Rod Sims as saying.

Australia’s big four banks were the focus of the inquiry, as well as Macquarie Bank. The competition regulator found that Commonwealth Bank, ANZ, NAB, Westpac and Macquarie Bank charged existing borrowers an average of 32 basis points more than new borrowers.

The overcharging was for standard variable interest rate residential mortgages issued between July 1, 2015 and June 30, 2017. This is based on findings from the interim report of the Residential Mortgage Price Inquiry.

The ACCC also said that banks seemed more interested in maintaining their current positions than offering a real choice to borrowers. Sims pointed out that they do not often see the big four banks vying to offer the lowest interest rates. The discounting by the big banks was also criticised, with claims that it lacks transparency and that it is nearly impossible for customers to obtain accurate interest rate comparisons without a great deal of effort and time.

A “large majority” of borrowers receive discounts, but they usually find it difficult to understand why lenders provide discounts. “The criteria used by different banks for determining the total discount offered to borrowers includes many factors, such as the individual borrower’s characteristics, their value or potential value to the bank, and their ability to negotiate,” the ACCC said.

All five banks provided an average discount of 78-139 basis points for variable interest rate loans during the two-year period studied by the ACCC. Sims believes that a number of Australians would likely benefit from either switching home loan lenders or threatening to leave their bank unless it reduces their mortgage. He added that it appears current customers are not being rewarded for their loyalty. The ACCC will release its final report later this year.