Exit fee ban - more hurt than help

By webmaster 23 February 2011 | 1 minute read

The government’s plans to ban mortgage exit fees are supposed to benefit home buyers and investors but the consensus among leading mortgage figures is that any such ban will do much more harm than good.

The federal government released its draft consultative paper outlining plans to ban all exit fees last week.

The National Consumer Credit Protection amendments regulation paper called for a blanket ban on exit fees for all lenders – not just the big banks.

Mortgage exit fees were introduced in the 1990s, as a means of offering borrowers reduced interest rates.  In particular, their uptake was prevalent among the non-bank sector, which used the fees in order to offer property buyers lower interest rates.

According to the mortgage industry, the outlawing of these fees will only serve to make borrowing more expensive because those costs previously carried by lenders will now need to be charged upfront.

Phil Naylor, CEO of the Mortgage and Finance Association of Australia (MFAA), labelled the ban “lunacy” while Michael Russell, CEO of Mortgage Choice, told me he was very disappointed in the Gillard Government’s announcement.

In particular, Mr Russell pointed out that ASIC conducted an assessment on exit fees not too long ago, which found the fees acceptable so long as they reflect a ‘reasonable’ recoupment of costs.

Indeed, ASIC released its regulatory guidelines for exist fees in November of last year, spelling out what costs and types of losses could be included in exit fees.

Tony D’Aloisio, ASIC chairman spelt out the following role of mortgage exit fees; “The law limits these fees to the recovery of a lender’s loss caused by the early termination. Lenders cannot use exit fees to discourage a borrower from switching their loan or to punish them for doing so.”

This sounds fairly reasonable to me, and it also sounded fairly reasonable to most of the industry, who see the government’s proposed all-out ban as a knee-jerk grab for good headlines.  But there are no good headlines here.

Exit fee ban - more hurt than help
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