Last month we looked at the ‘bank stoush’ and concluded it amounted to nothing more than good old fashioned one-upmanship.
As a consumer you could be mistaken for thinking the banks had experienced a change of heart and were genuinely looking out for you. However we pointed out that while a cash incentive [read bribe] might sound pretty enticing it didn’t mean that you would actually get the best or cheapest loan in the market. Consider CBA’s recent promotion of its ‘no fee home loan’ with a rate of 7.2% – we can currently source variable rate loans from as low as 6.88% with no upfront or ongoing fees.
This month we turn our attention to another topic of debate – the impending exit fees ban. Released some weeks ago, the Government draft proposes a ban on exit fees that will apply to any fee payable at the time of repayment, other than fixed rate break costs and discharge administration fees.
If legislated, this would effectively outlaw all fees collected by lenders at the time of settlement, including deferred establishment fees (DEFs), Lenders Mortgage Insurance (LMI), capitalised account keeping fees, and interest equalisation fees that recoup honeymoon rates. The proposed bans will apply to all lenders and all residential home and investment loans and if enacted in its current form, the measures would apply to credit contracts entered into after 1 July this year.
However rather than improve lending competition the overwhelming industry consensus is that the ban on exit fees will put the non-banking sector at a disadvantage and thus actually reduce competition amongst lenders.
DEFs [one of the more common types of exit fees] were introduced as a way for non-banks to offset their higher cost of funding as compared with the banks. People don’t realise that DEFs allow non-bank lenders to offer more competitive rates without disadvantaging the consumer – most DEFs no longer apply once you have held the loan for a period of 5 years.
Consider also the cost of funding a loan hasn’t changed for banks or non-banks so the exit fee will have to be recouped somewhere – remember there’s no such thing as a free lunch! The reality is that exit fees may in fact be replaced by higher establishment fees [mortgage application, valuation and legal fees] making it harder for consumers to get into a home loan. It might also result in higher ongoing loan costs, however time will tell because the government doesn’t look like its going to back down on the banning of exit fees.
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