Are home loan interest rates so confusing that they’re costing you money?

A new report from the Australian Competition and Consumer Commission (ACCC) has raised concerns about how Australia’s leading banks price and market home loans. It found that a lack of price transparency may be making it harder for Australians to compare home loans, and that mortgage holders staying loyal to their bank could be missing out on significant savings.

The ACCC’s Home Loan Price Inquiry interim report looks at the prices of home loans from the big four banks (ANZ, Commonwealth Bank, NAB and Westpac) between January and October 2019. According to the ACCC, these banks currently account for close to 80 per cent of the home loans held by authorised deposit-taking institutions in Australia by value.

Headline rates and discounted rates 

The report found that although the leading banks cut their headline variable home loan interest rates in 2019, these reductions didn’t accurately reflect the actual cost of these loans. This was because close to 90 per cent of home loan customers didn’t pay the headline rate, but instead received one or more discounts.

As well as advertised discounts, many mortgage holders receive discretionary discounts, often on a case-by-case basis, after the mortgage application’s assessment, which can make a big difference to the cost of a home loan. For example, the ACCC found that an owner-occupier applying for a new principal and interest on a $386,000 mortgage could save nearly $5000 in interest charges in the first year alone, if they can obtain the big four banks’ average discount of 128 basis points.

According to the ACCC, this lack of transparency in discretionary discounts makes it unnecessarily difficult and more costly for Australians to discover the best price offers.

The loyalty tax

The report also found that new home loan customers were being offered significantly lower interest rates than existing customers. At the end of September 2019, customers with new owner−occupier loans with principal and interest repayments were paying, on average, 26 basis points less than customers with existing loans.

This difference between interest rates for new and existing customers was found to be even more pronounced for existing mortgage holders that had been customers for longer. Existing owner occupiers that had been making principal and interest repayments for more than five years were found to be paying an average of 40 basis points above the interest rates for new customers at the end of September 2019.

To put this in perspective, the ACCC found that if a customer had been with a leading bank for five years or more, and had an existing loan of around $200,000, they could save around $850 within one year of refinancing to a new loan rate with one of the big four banks.

What you can do about your rate

ACCC chair, Rod Sims, encouraged Australians to do their research if they want to get a better deal:

“Given the economic disruption, uncertainty and job losses stemming from the COVID-19 pandemic, many consumers may not be inclined to shop around and ask for discounts from their banks right now.”

“However, our analysis shows how that even a small further reduction in interest rates could potentially save thousands of dollars over the life of a mortgage. Consumers should consider this carefully when it is time to re-engage with their lender.”

Whether you’re looking for your first home loan, or want to refinance your existing mortgage, it’s important to compare interest rates before making an application. If you’re not sure of the best home loan for you, contacting a mortgage broker may be able to help.

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