Thursday, March 27, 2008

The Bank Always Wins…

This week, the National Australia Bank nudged up its interest rates another notch, independently of any Reserve Bank action. The increase of 0.09% comes on top of last months increase in official rates and is just the latest slap in the face for homebuyers. The federal treasurer, Wayne Swan, has responded by suggesting that customers who are unhappy with the increase should “vote with their feet” and look for a better deal from another bank. But how practical is that advice?

There is a confusing range of fees imposed by banks on customers exiting their mortgages, and it’s easy to assume that these are designed to actively discourage bank-hopping. First there are discharge fees which are reported to range between $30 and $2475. The average is $315. Then, on top of that there are early exit fees, which can range from $700 up to $1000. Non bank lenders charge much more with an average of $2448 on a variable rate loan.

Then the penalties which apply to fixed rate loans are even worse with some reaching many thousands of dollars. Of course, it has to be said that you would be less likely to exit a fixed rate loan early because your interest rates are, by definition, not going up. Nevertheless, if you do need to bail out, it does get very expensive.

So, what is the point of advising bank customers to “vote with their feet” when such prohibitive fees make the exercise impossible? Under the circumstances there is very little else the treasurer can say or do. The banks are responding to the changed economic circumstances in which they find themselves, and are naturally attempting to preserve their own profitability. At the same time, for the treasurer to acknowledge that is politically suicidal. Instead he has no choice but to publicly chastise the banks in the full realization that his criticism is unlikely to make the slightest difference to the banks.

What might make some difference is taking steps to reign in the excessive fees charged by banks and other institutions. To that end, the treasurer has already initiated a review of such fees by the Australian Securities and Investments Commission. Whatever the findings of that review might ultimately be, it will all be meaningless unless banks and other lenders are prevented from thwarting genuine competition by using these unfair fees.

No comments: