The Australian Competition & Consumer Commission ("ACCC") has released its interim findings for its Home Loan Pricing Inquiry.
Scope of Inquiry
The report was focused on the four major banks ("the majors") and looked at how they priced mortgages (including the treatment of RBA cuts) between 1 January 2019 and 31 October 2019.
ACCC Chair Rod Sims said “maintaining profits was a major consideration for the big four banks as they weighed whether to reduce mortgage rates in line with RBA cash rate cuts during 2019”. Not really a surprise there, and many would argue that is what good companies should do, perhaps.
Speaking of rate cuts, Mr Sims said "When setting variable interest rates, the big four banks were often accommodative and focused on each other, giving little regard to smaller lenders. Comparatively, other banks employed a more diverse approach to pricing."
The Inquiry did acknowledge that the majors considered both community expectations and public reaction, when making their rate decisions.
Funding Costs
Perhaps a surprise, but the report showed that the banks’ funding costs fell more than the official rate cuts during 2019. The Inquiry also observed cuts to their headline variable rates were only made following the cash rate reductions in June, July and October 2019.
This was despite a sustained decrease in their cost of funds over much of 2019. The inference here is that if there is some disconnect to funding costs and RBA movements, why weren't funding cost savings passed on? (In truth, they were in part via mortgage pricing as we discuss below).
To that end, the ACCC urges customers to keep looking widely across the market for better pricing, reminding us that over the term of a mortgage this can be very material.
Comparison Rates & "Pricing"
The Inquiry cited a lack of price transparency and higher interest rates for existing loans continued to cost customers. Standard Variable Interest Rates or ("SVR") did not accurately reflect the price that customers actually paid for mortgages, as the majority of customers received discretionary rate discounts.
The average discount given by the majors off their standard variable home loan rates was 1.28% or 128 points.
Alternatively, this was represented across customers (by number not value):
| Interest Discount off SVR | % of Customers |
| 0.00% | 13% |
| 0.00% - 0.90% | 34% |
| 0.90% - 1.50% | 40% |
| 1.50% + | 13% |
Not surprisingly, we are seeing more and more pricing that is reflective of both risk (LVR's) and profit (loan sizes) and this is becoming increasingly fluid as bank treasuries respond to market changes.
In terms of new to bank versus existing customer, new owner-occupier mortgages were generated, on average, 26 basis points less than existing customers. The difference was often more material for people with older loans.
There is however greater awareness about re-pricing home loans with the existing lenders, confirming a more educated consumer.
Given the pain and cost associated with switching lenders, many home loan customers have remained with their existing lender, even if the opportunity cost is a bigger reduction elsewhere. The number of customers seeking re-pricing with their major lending increased by almost 100% to over 215,000.
Market Share
No real surprise, and despite some recent competition, data from APRA & the RBA highlighted the strong market share held by the majors and Approved Deposit taking Institutions ("ADI's"). ADI's account for circa 95 per cent of all outstanding home loans.
| Financier | Home Loan Portfolio (Billion) | Market Share |
| CBA | $445 | 26% |
| Westpac | $408 | 23% |
| NAB | $261 | 15% |
| ANZ | $247 | 14% |
| Other ADI's | $382 | 22% |
There has been erosion of the majors market share in recent years (ANZ leading the way there), though we are seeing some rapid share shift bank to the majors with the Covid-19 issues.
This can be where mortgages become about more than just price.
2020 Events & Summary
There is some great data in the Inquiry. I am just not sure beyond that what it achieves and whether it justifies the cost.
This is an extension of the discussion around where the balance between social and economic responsibility sits. Profits are good for shareholders, but not for customers? Then again, most of the customers are shareholders too...
www.accc.gov.au/focus-areas/inquiries-ongoing/home-loan-price-inquiry/interim-report