First test for mortgage exit fee legislation

The ban on mortgage exit fees introduced in July have been making their first impact this week, following the 0.25% interest rate cut made by the Reserve Bank.

All major lenders have been compelled to respond in the knowledge that home loan holders are now able to walk away from any home loan deal without incurring financial penalties.

November’s interest rate cut from 4.75% to 4.5%, the first cut in 2 ½ years, has provided the first real pretext for banks to respond amid concerns that, under the new legislation, loan holders could easily defect to banks offering better deals.

Were the full 0.25% cut to be passed on to consumers, the average standard variable mortgage rate would be falling from 7.79% to 7.54%, saving roughly $50 per month on an average mortgage.

In spite of a slowing housing market, which, in September, showed the lowest take-up of new houses in 11 years, figures show that since the banning of fees over 165,000 households have signed up for home loans. Prospective homeowners have been responsive to the prospect of extra consumer power and increased competition.

The Treasurer of the Reserve Bank, Wayne Swan, suggested that major banks should be passing on the full cut to consumers, and reiterated that their initiatives were designed to uphold strong competition in the banking sector.

“Our reforms, like banning mortgage exit fees on new loans, mean that Australian families can now more easily ditch any bank that tries to rip them off, and walk down the road to get a better deal.”

“Greedy”

How, then, did banks react? Most major lenders – Commonwealth, Westpac and ANZ – passed on the full 0.25% cut to their consumers by lowering their standard variable mortgage rates.

NAB, the National Australia Bank, on the other hand, were the last to respond to the rate cut, and passed on only 0.2%, which keeps its rates marginally ahead of its competitors. An unimpressed Wayne Swan labelled the institution ‘greedy’.

NAB blamed additional funding pressures for its shortcomings compared to its competitors, but this seems highly unconvincing following the announcement of their record high $5.5 billion annual cash profit last week.

Percentages or Principles?

It will be interesting to see whether consumers are more sensitive to percentages or principles over coming months. Banks could potentially exploit the ease with which consumers can now transfer mortgages, and NAB’s embarrassing show of frugality makes it a prime target.

From 2012, lenders will be legally obliged to help consumers compare loans when searching for their mortgage.

Could you benefit from the new legislation to improve your home loan deal? Use Which4U to keep a close check and see if you could take a better mortgage offer without charge!

Keith McDonald

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