$850 yearly savings won with small mortgage changes, ACCC finds

“Pricing for mortgages is opaque and the big four banks have a lot of discretion. The banks profit from this and it is against their interests to make pricing transparent,” said ACCC Chair Rod Sims.

“Borrowers may not be aware they can negotiate with their lender on price, both before and, particularly, after they have established their mortgage.”

According to the report, newer borrowers are paying lower interest rates than existing borrowers on average, but these lower rates are still available to existing borrowers if they negotiate with the major banks.

Through negotiation, savings of up to $850 a year in interest is possible, with tens of thousands of dollars available to those who have a larger than average residential mortgage (valued between $257,065 to $413,834).

These negotiations are taking place, the report suggests, from the spotlight being shone on the major banks by various bodies, with 11 per cent of borrowers on variable rate mortgages reducing their mortgage by the five major banks under review over the last year to 30 June 2018.

“It appears that media attention on banks arising from the royal commission, the Productivity Commission’s inquiry into competition in the financial system and the ACCC’s Interim Report on residential mortgage prices prompted some borrowers to review the prices they were paying for their residential mortgages,” the report noted.

Mr Sims said more people should ask their lender if they are getting the lowest possible interest rate for their mortgage and threaten to switch to another lender if negotiations fall through.

“I am afraid that the threat of switching banks will often be necessary to achieve a competitive mortgage rate,” Mr Sims said.

How were the big four banks raising interest rates?

With APRA’s decision in March 2017 to restrict new interest-only loans to 30 per cent of their total new loans, Mr Sims said the banks took this chance to raise prices for interest-only loans in total.

“These price rises were enabled by the oligopoly market structure in which the big four banks collectively have a market share of about 80 per cent,” Mr Sims said.

When ANZ announced an increase to its interest-only loans, the report noted that “it is likely that ANZ raised these rates expecting that competitors would follow its lead and this expectation proved correct”.

By doing so, customers would have gone to the other major banks for their interest-only loans in such a volume that the ACCC hypothesises they may have risked breaking the 30 per cent cap.

Therefore, following ANZ’s rise, the other major banks followed with rate rises for both existing and new interest-only loans, even though APRA’s measures were targeting new loans only.

“While the Inquiry Banks cited various reasons for doing so, we also consider this to be a further illustration of accommodative pricing behaviour among the big four banks,” the report stated.

“Together, the big four banks estimated revenue gains of over $1.1 billion for their 2018 financial year primarily as a result of these mid–2017 interest rate increases.”

The report also analysed seven banks that have not been scrutinised in commissions and reports, and found three were competing on price, and were doing so by offering lower rates, with some of the banks using brokers and aggregators in order to gain market share.

However, these smaller players are also more vulnerable to regulatory challenges that impact on using brokers as a distribution channel, the report added.