Banks have argued strenuously over the past year that established mortgage account holders don’t pay a premium or “penalty”, compared with new borrowers. The Reserve Bank says they do.
For variable rate mortgages, older loans typically have higher interest rates than new loans, the RBA says. This is the case even when borrowers with similar characteristics are compared.
This is one of the key findings from an expanded interest rate data set that the Reserve Bank, APRA and the Australian Bureau of Statistics have been working on over the past few years. The RBA has started publishing data from the new Economic and Financial Statistics series this year.
The work forms part of the RBA’s effort to increase the transparency of interest rates, something that was recommended by the Productivity Commission in its 2018 review of competition in the mortgage market.
It aims to empower consumers by giving them more detailed information about how banks charge different borrowers and give them the tools to be better informed consumers.
In an article in the latest Statement on Monetary Policy, the RBA says: “This means that exiting borrowers who are able to refinance with another lender or negotiate a better deal with the existing lender can achieve interest rate savings.”
The difference in rates between new and established variable rate home loans increases with the age of the loan. Just under half of the loans in the RBA’s data set were originated four or more years ago. Those loans have a rate that is 40 basis points higher on average than new loans.
For a loan with a balance of $250,000 that adds up to an extra $1000 of interest payments a year, at current rates.
Some of the difference can be explained by changes to the types of loans that are sold. For example, the share of interest-only and investor loans, which tend to have higher rates, has declined in recent years.
But even when the RBA compared loan types that were the same, older mortgages still tended to have higher rates than new loans.
Variations in rates reflects changes in the creditworthiness of borrowers and different features offered with loans. It also reflects the level of competition in the market; competitive pressure tends to be strongest for new borrowers and those who are shopping around to refinance.
The discounts lenders offer on their advertised standard variable rates have been widening over the years, from an average of around 100 basis points in 2015 to more than 150 bps last year.
The RBA confirms that banks compete for business by increasing the discounts for new and refinance borrowers, rather than lowering rates overall
“The rise in the average differential between new and existing loans reflects the increased discounting on more recently originated loans.”
And those discounts are usually set for the life of the loan.
Other findings from the RBA’s interest rate transparency project are that small businesses pay higher interest rates for finance than bigger businesses. However, small business loans secured by residential property are significantly lower.