Survey Results Show Existing Mortgage Holders Subsidise New Borrowers

Post by Sharat on October 6, 2009 · Under Australian Economy, Business News, banking, interest rates, mortgages · Comment

New research shows that lenders are charging existing mortgage borrowers higher variable interest rates than the average offered to new customers. The report has sparked fresh controversy over the cost of switching mortgages.

The survey was commissioned by The Australian newspaper and conducted by independent market analyst’s brandmanagement.

Results of the research show that the average variable rate offered to new customers was 5.24 per cent. However based on data obtained from 4,722 existing borrowers, the results also show that the Big Four banking groups charge them an average premium of between 29 to 44 basis points.

In its report The Australian said that the Big Four banking groups rejected the findings of the report, the results of which were made public the day before the Reserve Bank of Australia’s (RBA) board sits down for its monthly rate setting meeting.

The RBA is likely to hold interest rates steady, leaving them unchanged at 3 per cent.

Michael Cant, CBA’s mortgage chief said that a study of the lenders mortgage portfolio, worth more than $220 billion, suggested a difference of between 1-2 basis points in the average variable interest rate offered to new and existing customers.

CBA is Australia’s largest mortgage lender.

Mr. Cant did however concede that there would be a difference between existing customers and new customers, and suggested a premium existed because the survey included borrowers on honeymoon rates and introductory offers. Mr. Cant said that distortions could also have arisen because some borrowers are simply unaware of the discount they receive as part of a professional package.

A Westpac spokesperson told the Australian that the lender was puzzled by the results of the survey, as were NAB and ANZ.

Banks often offer discounts to new customers as high as 75 basis points on their standard variable mortgage rate. Despite the discount, banks are able to maintain profitability through their existing customer base, who essentially finance the discount lenders use to attract and win new business.

The gap was maintained by penalty fees and switching costs that were particularly punishing in the case of non-bank lenders. Along with general customer apathy, the fees discouraged borrowers from seeking better deals.

The results of the survey add weight to calls that the Australian mortgage lending business lacks competition, adding further pressure on the Federal Government to address the lack of competition, which has resulted in the Big Four banking groups coming to completely dominate the mortgage lending business of late.

Financial Services Minister Chris Bowen said the government had taken steps to ensure greater competition in the banking sector. But Nicole Rich, director of policy and campaigns at the Consumer Action Law Centre, said the government had failed to address the problem of mortgage exit fees.

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