The inquiry
On 14 October 2019 the Treasurer directed the ACCC to inquire into home loan pricing, with two questions: the prices charged for home loans since 1 January 2019, and what stops borrowers switching to another lender. An interim report took the first question; the final report, given to the Treasurer on 25 November 2020, took the second.
The ACCC’s starting point was simple. It said there has been a difference between rates paid on new and existing home loans since at least 2015, and that the gap would not have lasted if switching were easy: borrowers would have moved, and lenders would have cut rates to keep them.
The gap, by age of loan
The ACCC gave its own illustration of what that could mean. A borrower with a loan of around $250,000 who moved to a rate 58 basis points lower would save over $1,400 in interest in the first year, it estimated, and over $17,000 across the rest of the loan in present-value terms. That is the ACCC’s worked example from 2020, not a forecast for any loan today.
Older loans were common. As at December 2019, the report notes, almost half of all variable-rate loans had been taken out at least four years earlier.
Why borrowers stay put
The ACCC saw a lack of engagement, and gave two main reasons for it. Many borrowers assume they “probably won’t save much” by switching, and once a loan is set up, many are not prompted to think about switching unless something big changes, such as moving house. Survey data held by two of the four largest banks pointed the same way: across the five years to September 2019, under one borrower in five said they meant to refinance or switch lenders in the coming 12 months.
Asking the current lender
Staying does not have to mean paying the old price. The ACCC described retention offers: a discretionary discount, or a bigger one, that some lenders give an existing borrower to stop them switching, generally only on variable-rate loans. A borrower does not have to be leaving to get one; the ACCC says researching the prices on offer and asking the lender to match or beat them may be enough. In the 12 months to 30 September 2019, it found, the four largest banks granted a price reduction on over 600,000 home loans.
Moneysmart’s first step before switching says much the same in plain terms: tell the current lender about the cheaper loan elsewhere, because it may lower the rate to keep the business.
Prices that are hard to see
Comparing offers was harder than it needed to be, the ACCC found, mainly because of opaque discretionary discounts. These are offered case by case, usually after a lender has assessed an application, and borrowers cannot see the criteria for them or the prices other borrowers actually pay. It also noted that during 2019 two of the four largest banks reduced, or considered reducing, their reliance on such discounts, without direct regulatory intervention.
What it recommended
The final report made four recommendations, in this order:
- A yearly prompt. Lenders should send variable-rate borrowers whose loans are three or more years old a personalised prompt each year, comparing their rate with the average paid on similar new loans and setting out next steps.
- A standard discharge form. Lenders should be required to give borrowers a standardised Discharge Authority form that is easy to find, fill in and submit.
- A time limit on discharge. Lenders should have at most 10 business days to complete the discharge process.
- Continued monitoring. The ACCC should keep watching prices and competition in the home loan market.
These were recommendations to the Government in 2020. This page does not say which, if any, have since been adopted; the ACCC’s inquiry page holds the reports themselves.
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