How giving home owners a ‘nudge’ could lift mortgage competition

Even so, the home loan loyalty tax has only risen since late 2020, thanks to interest rate rises and competition between banks for new business.

Since the Reserve Bank started raising rates in May, banks have quickly passed on the 2.5 percentage points of rate rises to existing customers in full, while offering a better deal to new clients, who banks lure with lower rates or cash payments worth thousands of dollars. According to the mortgage broker Finspo, the gap between the rates paid by existing customers and new customers has blown out to a record 0.48 percentage points.

Is this widening 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 claimed there’s nothing much to see here – they basically say it’s a reality of capitalism that if you want a better deal, you need to shop around. That is true at a superficial level, but sorry, it’s not that simple.

The ACCC clearly thought it was a problem. It said that unlike other markets, mortgages were “opaque” because no one actually pays the advertised interest rates, making it hard to know if you’re getting a good deal.

Former ACCC chairman Rod Sims, who is now a researcher at the Australian National University, says: “The mortgage market is about as non-transparent as any market gets. You just do not know what other people are paying for interest on their mortgage.”

In response, the regulators have been trying to give people more information. The Reserve Bank in the past few years has been publishing data on the actual interest rates people pay on their mortgages, compared with those offered to new customers. There’s also an industry of mortgage brokers, comparison websites, and other fintechs that make money from encouraging people to switch banks.

This is all probably helping. More people appear to be getting the message about shopping around – that’s one reason refinancing has hit record highs lately.

The data-sharing regime known as open banking may eventually help too, because it would allow people to more easily share their financial information with a rival lender. However, data-sharing has been painfully slow to get moving.

With household interest costs rising – and major bank profit margins tipped to rebound sharply – the ACCC’s 2020 recommendations on removing barriers to switching and “nudging” still look relevant.

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The idea of giving people a “nudge” is a growing trend in global regulatory circles, with federal and state governments setting up teams to advise on behavioural insights in recent years.

Some banks have their own behavioural economists, and all lenders face growing pressure from regulators to make sure people are not in unsuitable products. The corporate watchdog, for instance, last week flagged a project aimed at improving outcomes for credit card customers, and Commonwealth Bank last year trialled a feature to give people a “nudge” to pay back credit card debts when they receive a tax refund.

Applying similar nudges to encourage customers to consider refinancing would no doubt be more complicated. But it could help to keep banks under pressure to offer competitive interest rates to existing customers, not just new borrowers.