Banks’ unclear pricing costing frustrated borrowers thousands
Borrowers who don’t shop around due to the banks’ unclear pricing tactics are losing out on an average of $850 a year, an ACCC report has found.
Get a load of this. The tactic which the banks use to makes it “difficult” for borrowers to discover the best rates on offer. Banks including ANZ, CBA, NAB and Westpac.
The tactic is called discretionary pricing. The Australian Competition and Consumer Commission (ACCC) has just released a scathing report on it.
So what is discretionary pricing?
The banks don’t really advertise their best home loan deals. But there are two kinds of discounts that they do offer.
The first is their “advertised discounts”, which are generally published on their website and relatively easy for borrowers to discover.
The second is “discretionary discounts”, which are much harder to find.
Discretionary discounts are offered on a case-by-case basis to individual borrowers. Usually after a separate request to the lender has been assessed.
The criteria for discretionary discounts is generally not disclosed to borrowers.
So what’s the problem?
Basically, the banks are intentionally making it pretty damn hard and time-consuming for borrowers. They don’t want you to obtain accurate lowest interest rate offers from multiple lenders.
They’re hoping you’ll just get too frustrated and put the whole ‘searching around for a better deal’ thing in the too-hard-basket. Or even better that you just go with the advertised rate and increase their margins.
The ACCC says that’s how it was for 70% of recent borrowers from one bank. They obtained just one quote before taking out their residential mortgage.
“The lack of transparency in discretionary discounts makes it unnecessarily difficult and more costly for borrowers to discover the best price offers,” says the ACCC.
This adversely impacts borrowers’ willingness to shop around. Whether for a new residential mortgage. Or when they are contemplating switching their existing residential mortgage to another lender. The unnecessarily high cost that prospective borrowers incur to discover price information from lenders causes inefficiency.
How effective is this tactic?
The rate of borrowers switching lenders remained extremely low last financial year.
In fact, less than 4% of borrowers with variable rate residential mortgages with the top five banks refinanced to another lender, says the ACCC.
That’s just 1 in every 25 mortgages.
(Note: only 11% of people got a better home loan deal from their current bank. Either asking for it or being offered it.)
“The big four banks profit from the suppression of borrower incentives to shop around and lack strong incentives to make prices more transparent,” says the ACCC.
How much are these opaque tactics costing some borrowers?
In two words: A lot.
The ACCC believes an existing borrower with an average-sized residential mortgage who negotiates to pay the same interest rate as the average new borrower could initially save up to $850 a year in interest.
“This could add up to tens of thousands of dollars over the full term of their residential mortgage in net present value terms,” the ACCC adds.
So will the banks stop doing it?
Unlikely. Well, anytime soon that is. Here’s what the ACCC say about it:
“At least one Inquiry Bank appears to be aware of borrower frustration with discretionary pricing. There is little evidence of any Inquiry Bank responding to that frustration by moving away from the practice,” the ACCC says.
“More generally, the Inquiry Banks, particularly the big four banks, lack a strong incentive to reduce the cost that prospective borrowers incur to discover price information because they profit from the suppression of borrowers’ incentives to shop around.”
So what can I do about it then?
That’s the easy part. Get in touch with us to discuss your refinancing and/or renegotiating options.
By teaming up with us, not only can you save yourself the headache of having to research the best available discount’s. We happily negotiate for it on your behalf.
So if you’re interested in potentially cutting down the amount of interest you pay each year. Give us a call today on 07 3911 1190.
Three financial tips for the savvy Millennial
It takes more than just cutting back on avocados to make it financially in Australia. Here’s what the under 35s really need to know.
A Deloitte 2017 Millennial Survey paints a less than rosy picture of the financial outlook for millennials in Australia – at least, from a millennial’s perspective.
It states that only 8% of young Australians (born after 1982 but before 2000) believe they will be financially better off than their parents.
However, there are several ways in which Millennials can proactively tackle these concerns and start working towards a financial future which could match – or indeed surpass – that of their parents.
Three financial tips for the savvy Millennial
1. Use tech to help you save
Millennials have one up on their boomer parents in the tech stakes, and the smart use of technology can seriously help you manage your money.
There are literally hundreds of free apps available to help you track your spending, save, and invest.
Here are a few of them:
Pocketbook is an Australian app which lets you to track expenses and set spending limits.
Money Smart’s TrackMyGOALS allows you to set, plan, track and manage your savings goals and visualise your progress.
Expensify allows you to scan receipts and track time or mileage for tax deductions.
2. Set up a budget
The single most important step a Millennial can make in terms of taking control of their finances is setting up a budget and tracking income and expenses.
This is because as soon as you start to see where your money is going – on takeaway coffee, on drinks and the pub, or on yes the ubiquitous avocado toastie – you’ll realise how much you can save by making a couple of small, but key, lifestyle changes.
Even as much as $5 a week in savings can start to quickly add up.
Setting up a budget is quick and easy and can now be done online, allowing you to add to your expense list when you’re out and about.
Use our free and user-friendly online budget planner.
3. Define clear financial goals
It’s never too early to start planning for your future. Indeed, the earlier you start, the more you’ll save and the quicker you’ll start racking up financial wins.
When setting your financial goals, the key is to make them achievable and time-bound.
With so much time to accumulate wealth over your lifetime, it’s also important to set yourself short, medium and long term goals, so you feel rewarded and satisfied throughout your financial journey.
Want to go on a trip to the States, or buy a new car? These might be your short to mid-term goals.
Want to have enough in the bank for a comfortable retirement? This is an important long-term goal which you need to start planning for now.
I’m still going to need some help
It’s normal for younger people to put their head in the sand when it comes to their financial future. It’s wise to dig it out as quickly as possible and start planning.
If you need help in setting yourself up for a healthy financial future, come and talk to us.
There are many more ways we can help you set out on the path to wealth as soon as possible.
Mortgage stress: What it is, and how to avoid it
You might be comfortable paying off your mortgage now, but what if things change? Here are some tips on how to avoid a mortgage stress fracture.
Paying off a mortgage is one of the biggest financial challenges you and your family will ever tackle.
And it isn’t easy. Mortgage repayments take up about one-quarter of a family’s income on average. According to the Australian Bureau of Statistics’ 2016 Census.
While most families manage, what happens if your circumstances change?
- unexpected redundancy,
- relationship breakdown,
- illness or
All could dramatically impact your ability to make your payments and put you in mortgage stress.
But first, what is mortgage stress?
While there isn’t a technical definition for the term. Mortgage stress is generally considered to occur when a person or family is spending 30% or more of their income on home loan repayments.
There are also a range of other criteria which would suggest you’re experience mortgage stress:
- paying only the interest on your home loan,
- borrowing money from family, or
- having difficulty paying your bills
Then you might be experiencing mortgage stress.
I don’t have a problem now, why worry?
It’s unwise to assume your circumstances will never change. An accident or illness can befall a person at any time. The impact on your finances can be devastating.
An increase in interest rates can also have a significant impact on your mortgage repayments. A simple 0.25% rate hike can increase repayments on the average Australian loan ($375,000) by about $50 a month.
Over the course of a year – and with a potential of further rate hikes – this can really chew into your disposable income.
Ok, so how can I avoid it?
The smart borrower won’t wait for their circumstances to change. They will start planning now to make sure they can weather a storm if it hits.
Steps you can take to reduce your risk include:
Step 1: Use a mortgage calculator to see what your repayments would look like if there was a rate increase. Would you be able to keep up?
Step 2: Review your current income and expenses. Make a new family budget. Use it to track where your money is going and where savings can be made. Either pay off your mortgage sooner or get by if things go awry.
Step 3: If you’re worried about your mortgage. Concerned about the impact of a future rate hike. Give us a call on 07 3911 1190 and let’s have a chat about your concerns.
We can talk to you about your situation and help you make a plan to ensure a small problem doesn’t become a big one.
Shares vs Property: the pros and cons breakdown
NRL vs AFL. Neighbours vs Home & Away. Gas vs charcoal grill. Ford vs Holden. We Aussies are no strangers to a heated debate. And that extends to the shares vs property discussion.
You’ve probably seen it unfold at the family BBQ before.
Uncle Mick will swear black and blue that property is the only way to go, as he bought his $1 million beachside shack for just $20,000 thirty years ago.
He’s immediately countered by your know-it-all second cousin James. His hand-picked share portfolio has outperformed the property market five years running, he claims, as he casually reels off lingo such as “bullish” and “bearish”.
But as with most things in life, the best option depends on your individual situation. So let’s run through the five major pros and cons of shares vs property.
- You will receive regular income from dividends. Which tend to grow with CPI, and can pay 6%-7%.
- Easy for you to buy and sell on the market for a low cost.
- You can Easily diversify your portfolio. Providing you with exposure to many different companies or industries.
- Little hassle after your initial investment. That can be as little as $500.
- No leverage means you can’t lose more than you invested.
- The share market can be volatile and you are exposed to market crashes.
- They’re not a physical asset.
- You can’t leverage them during periods of high growth.
- Typically you have to pay capital gains tax when shares are sold.
- No control over the day-to-day operations of the company you invest in.
- Many investors like the tangibility of having a property and/or a stable place to live.
- You can use borrowed funds to invest and leverage returns, which is handy during periods of low interest rates.
- You’re able to renovate to add value to your asset.
- There’s the potential for negative gearing.
- Lack of correlation with other asset classes.
- Your worries could include bad tenants, rental vacancies, interest rate rises. Plus you have you have to allow costs for real estate agent, body corporate, land tax, and maintenance.
- May limit diversification as a large chunk of your money is tied to a single asset.
- Leveraging magnifies losses, so you can lose more than you invested.
- High transaction costs associated when you buy or sell. Which typically takes months to conduct.
- Your entry point for investment is high. With your deposit plus taxes and stamp duty. You may also need to borrow a significant amount which could leave you with negative equity if the property drops in value.
As you can see, what might be a major sticking point for your uncle, could be water off a duck’s back for your second cousin. And vice-versa.
So rather than getting drawn into a pointless debate and being forced to pick a side. Call and chat with us for unbiased advice on what would best suit your individual situation.
Besides, someone’s got to keep an eye on those lamb snags (which are clearly superior to beef snags).