15 Mar 2011

The Mortgage Exit Fee Myth

The increasingly heated debate about whether banning mortgage exit and deferred establishment fees on home loans would deliver further competition to the banking sector and in turn benefit borrowers, is leaving consumers scratching their heads.

On the surface removing fees – any fees – from mortgages sounds like a positive move for borrowers. But it’s a complicated story.

Mortgage House of Australia CEO, Ken Sayer refers to the so-called “bank wars” as gimmickry. (Banks are cutting fees on mortgages and last week the CBA, NAB, ANZ and Westpac unleashed high profile promotional campaigns in which they offer to pay the exit fees of customers who have home loans with rival banks and want to switch to them.)

Mr Sayer explains that banks are primarily profit and shareholder dividend driven. Therefore it stands to reason that any abolished and/or ‘magnanimously’ paid fees will simply get absorbed elsewhere and consumers will be none the better off.

“Banks have to maintain their profits. Unless they increase that bottom line year-in, year-out, market share will drop and the CEOs won’t be paid out their bonuses,” Mr Sayer told BrokerNews.

Speaking about the Federal Government’s planned exit fee ban federal shadow treasurer Joe Hockey maintains that the move will do little to enhance competition because the ban will end up hurting non-bank lenders, the very players who were responsible for introducing competition into the banking sector by driving interest rates down in the mid-90s.

Economist Dr Nicholas Gruen told ABC Inside Business presenter Alan Kholer that the non-bank lenders have typically had to cover the risks entailed in obtaining funding by charging exit fees.

Last week the Federal Government released a draft of its planned exit fee ban and the Mortgage and Finance Association of Australia (MFAA), the peak body for non-bank lenders and home loan brokers, has slammed it and asked the government to change its tack.

The main message being delivered by MFAA CEO Phil Naylor is that consumers are being fooled by spin.

Describing the draft legislation as “ill-conceived” Mr Naylor claims that banning exit fees will “stifle competition” as opposed to stimulating it.

If exit fees are banned, says Mr Naylor, borrowing will become harder, particularly for first home buyers and those with small deposits because costs previously carried by lenders will need to be charged upfront. This means bigger deposits and even more unaffordable homes for Australians.

The end result will be less choice for borrowers, he adds.

“If exit fees are prohibited, balance sheet lenders (banks) can simply dive into their very deep pockets and wait until their competitors exit because they have run out of funds. Then when competition is reduced, the lenders left standing can put rates up again,” says Mr Naylor.

“The banning of exit fees will also reduce product flexibility. It is likely that honeymoon interest rates, lenders paying mortgage insurance and establishment costs, loyalty interest rates, and many other flexible loan features will disappear.

“Such a major change to the law should be put through both houses of parliament rather than be snuck through by regulation,” Mr Naylor continued. “The opposition and some independents have already expressed their opposition to the move, but are being denied the opportunity to vote against it.

“Nobody has advanced one good reason for banning exit fees, and so this initiative is playing on cheap headlines without understanding how the mortgage industry works.”

Mr Naylor concluded by saying: “What the government is doing now is lunacy – catching a quick 10 second grab (banning exit fees sounds good at first glance) – at the expense of the Australian public.”

Mr Sayer’s final comment is that the whole issue is about “smoke and mirrors” and the exploitation of borrower hardship.

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