Lenders should urge borrowers to review the rate: ACCC final report
Australian Competition and Consumer Commission (ACCC) has published its final welcome Loan price survey report, which examines how the mortgage market works and the potential improvements that could be made to it.
Building on the interim report published earlier this year, the final report (published Saturday, December 5) found that a lack of price transparency and higher interest rates for existing loans persisted in the credit landscape, and the difficulty of switching loans made it difficult for borrowers to do so.
While ACCC was not charged with reviewing the conduct or role of mortgage brokers, APRA or ASIC in the investigation, it did acknowledge that brokers help disseminate mortgages and “Play an important role in reducing research costs”.
However, he added that lenders had to do more because “[brokers] cannot completely solve the unnecessarily high research costs that are caused by opaque prices.
The final report reads: “Mortgage brokers can help borrowers generally navigate the market and can provide borrowers with more detailed information on the factors lenders take into account in determining discretionary discounts, as they can have access to certain information (not accessible to the public) on lenders. ‘Discretionary discount policies. However, ultimately these discounts are determined by lenders on a case-by-case basis, taking into account several unique characteristics of an individual borrower and their loan.
“While a broker can use their professional judgment to estimate the price a lender would offer considering all of these characteristics, they usually cannot provide an exact final figure, which only a lender can quote after reviewing the request. mortgage loan from a borrower. Therefore, in most cases, consumers will still need to go through the process of applying for a home loan from a lender to determine the actual price of the home loan, although each application process is likely to be made easier with the help of a broker. “
Given the barriers to transparency and change, ACCC recommended that a series of steps be taken to improve the mortgage lending process for clients.
A prompt for variable rate borrowers
The ACCC found that in September 2020, borrowers with home loans between three and five years were paying on average about 58 basis points more than the average interest rate paid for new loans.
Further, he found that bborrowers with loans of more than 10 years paid, on average, about 104 basis points more than the average interest rate paid for new loans.
For example, he pointed out that a borrower with a $ 250,000 home loan could save over $ 1,400 in interest in the first year by taking a loan with the lowest average interest rate paid on new loans. . Over the remaining term of the loan, this borrower could save more than $ 17,000 in interest.
As such, the ACCC recommends that all lenders be required to provide borrowers with variable rate loans taken out three years or more ago, with an annual prompt to encourage borrowers to enter the loan market. real estate to see if they could benefit from a change of lender or mortgage products.
This prompt should prompt clients to contact their existing lender to ask for a better rate and “also encourage borrowers to contact their mortgage broker”.
The ACCC suggested that consumer testing and trials should be undertaken to determine the “optimal design” of the prompt, however, it suggested it should:
- be provided directly to borrowers
- communicate the potential benefits of the change in a compelling and personalized way, including a comparison between the borrower’s current interest rate and the average interest rate paid for new loans similar to the borrower’s loan
- define the next steps for borrowers to seek a better mortgage deal.
A standardized discharge authority form
The report found that the discharge process can be “unnecessarily difficult and time consuming for borrowers” and often involves “unclear and / or complicated steps for borrowers, including discharge authorization forms which are difficult to access. and to meet, or administrative obstacles such as lenders requiring a “person to contact before processing a discharge request”.
Indeed, the commission added that borrowers may be uncertain about the length of the discharge process and that there are unnecessary delays in the process (especially due to the use of retention strategies by existing lenders) .
In addition, he warned that pain points in the discharge process “hamper change and impose costs on market players more generally, including lenders, mortgage brokers and borrowers.”
As such, he recommended that all lenders be required to provide borrowers with a standardized discharge authorization form to complete and allow “duly authorized third parties” (for example, a settlement agent, mortgage broker or a new lender) to complete and submit the release forms on behalf of borrowers.
“The form should be easy to access, complete and submit. Lenders should adopt an identical standard form template, rather than accepting common criteria and continuing to design their own forms, which would potentially allow them to add fields or make forms unnecessarily complex, ”the report said. .
According to the ACCC, the form should only ask the borrower for the details necessary to process their discharge request.
He suggested that the design and implementation of the form would require further consultation with industry and regulators.
Maximum time for existing lenders to process discharge requests
In addition to a standardized form, the organization suggests that all lenders be subject to a maximum period of 10 working days to complete the discharge process.
This would cover the period from the time the borrower (or a third party acting on their behalf) submits the discharge authorization form until the time the existing lender is ready to begin the settlement process.
“Although the stakeholder consultation indicated that 10 working days is an appropriate period for processing discharge requests, further stakeholder consultation will be required on the appropriate time frame,” the report said.
This consultation could also cover:
- the precise definition of the starting and ending points of the discharge process to which the time limit should apply; and
- time limit exemptions to address circumstances where the existing lender cannot meet the time limit due to factors beyond its control.
Continuous monitoring of competition and prices in the mortgage market
Finally, the investigation concluded that the ACCC should “continue to investigate and monitor competition and pricing in the mortgage market, under the direction of the government.”
This new survey would focus on the top 10 lenders in the mortgage market and consider other lenders or groups of lenders (such as non-ADIs) as competition concerns involving or affecting these lenders are identified.
He said: “In assuming this role, ACCC should consider the following issues:
- the difference between the prices paid on new and existing home loans;
- the difference between the prices advertised for mortgage loans and the prices actually paid by borrowers;
- the prices charged by lenders and their pricing decisions;
- the impact of current and future government initiatives and regulatory interventions, including the Consumer Data Right and the recommendations of the Mortgage Pricing Survey Final Report, on mortgage prices, including mortgage rates. interest, fees and charges; and
- other emerging issues and lender practices that impede competition or consumer outcomes that arise during the period of investigation.
The ACCC said it is expected to report its findings to the Treasurer each year over a five-year period, providing its first report to the Treasurer by September 30, 2022.
The ACCC concluded: “We believe that the evolution of lenders towards more transparent pricing, and the continued competitive and other pressures that encourage increased price transparency, mean that further regulatory intervention is not required at this stage. .
“However, if the ACCC observes through its oversight (under recommendation 4) that the momentum towards price transparency has stalled, or if we observe consumer harm associated with a lack of transparency in pricing. price, we will consider making recommendations to the government to address it. “
“We want to make it as easy as possible for borrowers to change lenders”
Speaking after the report’s release, ACCC President Rod Sims said: “A significant number of Australian home loan borrowers have not switched lenders for several years, but they could save a lot of money by doing so.
“There are factors that prevent mortgage borrowers from switching lenders, such as a lack of clear and transparent pricing, as well as inconveniences and time costs, but for many borrowers the change will be worth it. .
“Our recommended prompt would make it clear to many borrowers how much their interest rate is higher than that of new borrowers,” Sims said.
“This information would be a powerful motivation for borrowers to seek a lower rate from their current lender or to switch to a new lender. It would also encourage lenders to offer existing customers better rates, fostering more competition in the industry. “
He continued, “Existing lenders want to keep their borrowers, so there is no incentive to make the discharge process quick or easy,” Mr. Sims said.
“We want to make it as easy as possible for borrowers to switch lenders, as it should be in all markets. Our recommendations are designed to make this process faster, less confusing, and less frustrating. “
“The Consumer Data Right will also help the process of finding a better deal and changing, by allowing borrowers to ask their bank to share their mortgage data with accredited third parties, such as other lenders or departments. comparison, ”he added.
The government said it “will review the report and respond to it in due course.”
Annie Kane is the managing editor of The Adviser and Mortgage Business.
In addition to writing about the Australian brokerage industry, mortgage market, financial regulation, fintechs and the broader lending landscape – Annie is also the host of Elite Broker and In Focus podcasts and The Adviser Live webcasts. .