Summary of Home Loan Price Inquiry (interim report) by ACCC dated March 2020.

[1] This interim report ('report') is about lending practises of the big 4 banks in Australia (Big 4) between Jan 2019 to Oct 2019. I have taken the liberty of reading 84 pages and summarised this in simple terms. The take-away is acute lack of price transparency makes it difficult for customers to compare. This report applied variable rate loans only. Using headline rate is usually not a good measurement of actual costs pay by borrowers as it excluded the discount given. To highlight this, the report says as at 31 October 2019, around 13% of Big 4s' customers received a discretionary discount of 150 basis points or more off headline variable rates (as mentioned this report deals with "variable loans"), while around 11% received no discount. The interest rate that borrower actually pays have two components - the headline rate (has both fixed and/or variable combo) and the discount off the headline rate given by the lender. Headline rate is also a "reference" rate to get eyeballs. To illustrate this headline variable rate by itself with existing clients, as at 31 October 2019, the gap between the headline variable rate and the average interest rate paid on standard owner-occupier loans with principal and interest repayments across the Big 4 ranged from 123 to 131 basis points. As to the "discount", ACCC opined that lack of transparency in discretionary discounts makes it unnecessarily difficult and more costly for consumers to discover the best price offers. In my view it is also arbitrary and may even open to 'abuse' and 'corrupt' practices (can be non-financial rewards such as favours). ACCC in another 2018 report highlights that prior to 2015 lenders had a single headline variable rate (known as “standard rate”) but now they maintain several headline rates for various products and combinations of borrower and repayment types. These market imperfections discriminate against the less sophisticated borrowers. 

[2] A surprising outcome is that "loyalty" costs more and ACCC refers to borrowers with greater than five years old were, on average, paying 40 basis points above what the big four banks’ customers with new loans were paying. This demonstrates the importance of home loan customers shopping around and asking about available discounts. 

[3] The report also concluded when the Big 4 are making headline rate decisions, a key consideration for the banks was maintaining their profitability against internal benchmarks. The Big 4 prefer not to reduce deposit rates. An interesting observation is that the big 4 were keen to match the headline variable rates among themselves but not others, even though the latter are growing at the big four banks’ expense. However, when it comes to discounting the Big 4 are more aggressive in part driven by competition from other lenders.

[4] The report include a nice table to show how the rates compared

[5] I chance upon this "discounting" comparison in the report at Table 4.2 and you can see that except for Westpac, the other 3 seems to be giving averaging same discounting rate. In short, Westpac seem to be getting clients without the need to give more.

[6] The answer may be found here in Table 4.1 from the report as I discovered, while Westpac does not give larger discount to individuals to close the loan, it provides a lower advertised interest cost for package loans. In short, use lowest advertised rate as bait and once hook, negotiate with them (read as throwing some discount) and still come out as a winner, better by 10 bps over the other 3.

[7] The report also says consumers will be able to direct the big four banks to share their credit and debit card, deposit account and transactional account data with accredited data recipients from 1 July 2020. Consumers’ home loan data will be able to be shared from 1 November 2020. The importance of this cannot be understated in particular when it comes to Serviceability Assessment which refers to ‘the calculation of whether a borrower can afford the repayments on a loan, after other expenses and income are taken into account’. In short, after 1 July this year, the big 4 will be able to procure clients' data at their request to provide a better and more accurate serviceability assessment .ie Big 4 will have all your expenses and income once you give them permission.

At the end I encourage Appendix B to be read, it explains again in the details the components for a loan (charges and rates) that a bank earns from lending.