Still, the loyalty tax on home loans has only risen since late 2020, thanks to interest rate hikes and competition between banks for new contracts.
Since the Reserve Bank started raising rates in May, banks have quickly passed on the 2.5 percentage points of the rate hikes to existing customers completely, while offering a better deal to new customers, enticing banks with lower rates or cash payments worth thousands of dollars. According to mortgage broker Finspo, the difference between the rates of existing customers and new customers has risen to a record 0.48 percentage point.
Is this growing gap between the rates that different groups of people pay on their loans a problem? And if so, what could be done about it?
Banks have long argued that there isn’t much to see here – they basically say it’s a reality of capitalism that if you want a better deal you should shop around. That’s true on a superficial level, but sorry, it’s not that simple.
The ACCC clearly thought it was a problem. It said mortgages, unlike other markets, were “opaque” because no one actually pays the advertised interest rates, making it difficult to know if you’re getting a good deal.
Former ACCC chairman Rod Sims, now a researcher at the Australian National University, says: “The mortgage market is about as opaque as any other market. You just don’t know what other people are paying in interest on their mortgage.”
In response, the regulators have tried to give people more information. In recent years, the Reserve Bank has published data on the actual interest rates people pay on their mortgages, compared to the interest rates offered to new customers. There is also an industry of mortgage brokers, comparison websites and other fintechs that make money by encouraging people to switch banks.
This probably all helps. It seems that more and more people are getting the message about shopping – that’s one of the reasons why refinancing has hit record highs lately.
The data-sharing regime, known as open banking, may also ultimately help, as it would allow people to more easily share their financial information with a rival lender. However, data sharing has gotten off to a painful start.
With household interest costs rising – and major banks’ profit margins expected to recover strongly – the ACCC’s 2020 recommendations on removing barriers to switching and nudging still seem relevant.
The idea of empowering people is a growing trend in global regulatory circles, with federal and state governments establishing teams in recent years to advise on behavioral insights.
Some banks have their own behavioral economists, and all lenders are under increasing pressure from regulators to make sure people aren’t in unsuitable products. For example, the business watchdog last week flagged a project aimed at improving bottom line for credit card customers, and Commonwealth Bank tried out a feature last year to “nudge” people to repay credit card debt when they receive a tax refund.
Applying similar nudges to encourage customers to consider refinancing would undoubtedly be more complicated. But it could help pressure banks to offer competitive interest rates to existing customers, not just new borrowers.