This is the final report on the residential mortgage prices of the five banks subject to the Major Bank Levy (the Inquiry Banks). The report outlines the Inquiry Banks’ price decisions over the price monitoring period from 9 May 2017 to 30 June 2018 and the factors that influenced those decisions. We also report our findings on whether the Major Bank Levy was passed through to residential mortgage borrowers during this period.
Building on the signs of a lack of vigorous price competition set out in the Interim Report, we observe that opaque discretionary pricing by the Inquiry Banks stifled price competition during the price monitoring period. Opaque discretionary pricing inflates borrowers’ costs (including their time and effort) to discover better offers. This adversely impacts their willingness to shop around, either for a new residential mortgage or when they are contemplating switching their existing mortgage to another lender. The unnecessarily high cost of price discovery is likely a key reason why 70 per cent of recent borrowers surveyed on behalf of an Inquiry Bank said they had obtained just one quote before taking out their residential mortgage. We consider that the big four banks profit from the suppression of borrower incentives to shop around and lack strong incentives to make prices more transparent.
It appears that media attention on banks arising from the Royal Commission, the Productivity Commission’s inquiry into competition in the financial system and the ACCC’s interim report on residential mortgage prices prompted some borrowers to review the prices they were paying for their residential mortgages. Despite this, the rate of borrowers switching lenders remained low; less than 4 per cent of variable rate residential mortgages with the Inquiry Banks’ main brands refinanced to another lender in year to 30 June 2018.
A borrower’s willingness to negotiate with their lender has been an important factor in the pricing of their residential mortgage. Not all borrowers may be aware they can negotiate with their lender on price either before or after they have established their residential mortgage. Around 11 per cent of borrowers with a variable rate residential mortgage at an Inquiry Bank obtained a reduced interest rate or reduced fees in the year to 30 June 2018 as a result of asking their bank for a better deal or accepting a bank-initiated offer.
The report also undertakes a detailed study of the factors that drove the Inquiry Banks’ decisions to make headline variable interest rate changes, as announced in June 2017.