While increasing competition in the home loan market may have been its aim, the Federal Government’s decision to ban exit fees may have the opposite effect.
Aussie’s Founder and Executive Chairman John Symond said the ban will lessen competition in the mortgage market, add to the cost of home loan and may even cause higher interest rates.
“The ban will hurt not help borrowers, as it will end up adding to the costs of their mortgages,” he said.
Mr Symond added without exit fees most lenders will be forced to introduce loan application fees or increase variable interest rates to cover the costs of setting up loans. These costs include valuation and legal fees – usually charged by third parties.
“With exit fees being banned, consumers may well find themselves in a position where they will have to pay costly loan application fees or possibly higher interest rates, as the majority of lenders will need to recover their costs”, he said.
He said the big banks were in a much better position to recoup their upfront costs from establishing mortgages for homebuyers as they have a suite of other financial products they can cross-sell such as credit cards, savings accounts and insurance.
“It is possible that the banks will carry the costs and watch the smaller players become less competitive over the next couple of years,” he said.
It may even cause them to lift interest rates, meaning consumers will swarm to the lenders who have the more competitive rates – ie, the big banks.
Mr Symond said: “The banks also enjoyed the protection of government savings guarantees and wholesale funding guarantees, further enhancing their competitive position against the smaller players”.
“It has been the non-banking industry over the last 20 years that brought competition to the mortgage market and forced rates down. The Federal Government’s ban will go a long way to undoing that good work by making it harder for smaller players to compete”.