The ACCC explains how Australia's banks make it hard to work out how much your mortgage costs

• The banks make it difficult to work out how much a mortgage costs, says the ACCC.

• And this means most people won't even try to shop around for a better deal.

• But the ACCC says just asking your bank for a better rate can result in a cheaper loan.

---

The banks make it so difficult to work out how much a mortgage costs that shopping around for a better loan isn't an option, according to analysis by the consumer watchdog, the ACCC.

An inquiry found that price competition on residential mortgages is stifled by opaque, discretionary pricing.

The ACCC’s Residential Mortgage Price Inquiry monitored the prices charged by the five banks affected by the government’s Major Bank Levy between May 2017 and June this year.

Unnecessarily high search costs or effort required by borrowers to find better prices reduces their willingness to shop around, says the report.

However, many borrowers who negotiate with their bank can get a better deal.

“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,” says 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.”

An existing borrower with an average-sized mortgage could save up to $850 a year in interest if they negotiated to pay the same interest rate as the average new borrower at the five banks under review. For many the gain will be larger.

It appears that media attention on banks from the financial services royal commission, the Productivity Commission’s Inquiry into competition in the Australian financial system and the ACCC’s inquiry prompted some borrowers to approach their lender for a better rate.

The ACCC says about 11% of those borrowers with variable rate mortgages had the price of their current residential home loan reduced.

“I encourage more people to ask their lender whether they are getting the lowest possible interest rates for their residential mortgage and, as they do so, be ready to threaten to switch to another lender,” says Sims.

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

The ACCC's inquiry also found no evidence that the five banks changed prices specifically to recover the cost of the Major Bank Levy,

But measures by APRA to limit new interest-only residential mortgage lending created an opportunity for banks to synchronise increases to variable interest rates for interest-only mortgages.

“We were not surprised banks seized the opportunity to increase prices for interest-only loans. 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,” says Sims.

ANZ was the first bank to announce increases to interest-only rates in June 2017. It did so safe in the knowledge that its move would put the other banks at risk of breaching the APRA limits, says Sims.

The other four banks then announced similar changes in the same month. Overall the big four banks gained an estimated combined $1.1 billion in the 2018 financial year, mainly as a result of the rate increases.

“We consider that ANZ increased its rates, clear in its belief that, given the APRA limits, the other big four banks would follow its lead, and this expectation proved correct,” says Sims.

The ACCC calculated that the rate increases by the five banks would have added, in the first year, about $1,300 in interest charged to the average-sized owner-occupier interest-only standard variable mortgage.

“Such is the oligopolistic nature of banking that the banks all took the opportunity to increase rates on both new and existing interest-only mortgages, despite APRA’s measures only applying to new lending,” says Sims.