Banks Come Clean
The Age
Monday June 16, 2003
Christine Long reports on how the new comparison rate can help you shop for a mortgage.
Financial institutions have long known that whatever they sacrifice to deliver lower home loan interest rates can easily be recovered with ongoing fees.
It is a neat marketing ploy that has worked wonders for them for years.
From July 1, however, new consumer protection legislation will make it easier for people to tell at a glance the true cost of their mortgages. Mortgage lenders and finance brokers in Australia will be required to carry the tell-tale comparison rate in their advertising.
The difficulty of assessing loans and their fees (many buried in the fine print of contracts) has fanned the growth of the mortgage broking industry.
However, the comparison rate, also known as the average annualised percentage rate, is designed to give consumers a better guide to the ``true" cost of a home loan. It includes the interest rate plus any establishment and ongoing fees. The comparison rate can differ significantly from the interest rate.
Lenders already have to include the comparison rate in their loan documentation, but Catherine Wolthuizen, finance policy officer with the Australian Consumers Association, says the new requirements recognise that consumers need help deciphering the true cost of a home loan earlier in the process.
``The explosion of new products and providers in the market has greatly increased the complexity of choosing a mortgage," she says.
In particular, honeymoon deals - where a lower rate may apply for six months to two years - can ``obscure" the true cost of a home loan, Ms Wolthuizen says. In some cases potential borrowers have ended up out of pocket because they discovered the true cost of the loan only after paying a hefty application fee.
According to the financial services research firm Cannex, there are about 100 home loans in Australia with introductory rates.
James Dick, a senior financial analyst with Cannex, says one example is the United Credit Union Premium One Year Introductory Home Loan. Its honeymoon rate of 5.69 per cent sounds attractive, but because it reverts to 6.69 per cent after one year - and there is an upfront fee of $600 - the comparison rate is 6.613 per cent. That is only slightly less than the comparison rate for the credit union's standard variable home loan of 6.628 per cent, Mr Dick says.
However, comparison rates do have limitations. Kathlene Jones, director of research and client solutions at Cannex, says: ``I think it's a very good way for people to be able to compare the real cost of a mortgage, but they should be very much aware it may not include all the costs."
Any costs, such as mortgage insurance, that are not ``ascertainable" at the beginning of the contract, are left out, and so are government fees and charges. Likewise, fees linked to the borrower's behaviour, such as redraw fees, are omitted. ``That could make a difference, particularly if you're using one of the basic home loan products," Ms Jones says.
Phil Naylor, chief executive of the Mortgage Industry Association of Australia, says early repayment charges are also left out of the calculation.
``Fees and charges are only included in the calculation if they are known when the comparison rate is disclosed," he says.
It is important to remember that different loan amounts and terms will produce different comparison rates.
The comparison rate contained in home loan advertisements will be based on a standard term of 25 years and an amount of $150,000. If you want, for instance, a $300,000 mortgage, you will need a comparison rate schedule with a range of terms and loan amounts.
All lenders and brokers must display a comparison rate schedule for each product at their offices and give it to consumers with any application form for credit.
Tania Turnbull, head of marketing at ANZ Mortgages, says borrowers will be able to enter their specific term and loan amount into a comparison rate calculator on the ANZ website.
Warren O'Rourke, head of corporate affairs at Mortgage Choice, says lenders will not be required to produce a comparison rate for some products, such as interest-only loans.
How useful is the comparison rate? It depends on what you are looking for in a home loan.
Rebecca Taylor, a spokeswoman forSt George Bank, says cost is only one reason for selecting a particular loan. ``Other factors can be equally or more important as the comparison rate in determining the correct loan for customers."
Customers might want to consider whether they would like 100 per cent offset accounts, redraw facilities and multiple sub-accounts or other products, such as insurance, transaction accounts and credit cards.
Some bank customers rate convenience, flexibility and their relationship with the lending institution alongside factors such as the price of the loan.
For this reason, it is unlikely the increased prominence of comparison rates will do away with the need for mortgage brokers that are now used to source between a quarter and a third of all home loans in Australia.
Ms Wolthuizen says a borrower who is looking for a cheap home loan, and who knows which features they want, may be able to rely on shopping around, using the comparison rate as a guide. ``Other people will still seek an intermediary because they are less knowledgeable about what they are looking for."
If you fall into that category, it is still worth doing your own research.
It is also important to be aware of the broader implications the new comparison requirements could have for the mortgage market.
Mark Bouris, chairman of Wizard Home Loans, which has been carrying comparison rates on its advertising since 1998, believes the new law will ``wipe out" the advertising of honeymoon rates. For that reason, he urges consumers to be particularly careful about entering into honeymoon deals in the lead-up to July 1.
Mr Bouris says he has noticed a surge in honeymoon deals by lenders as they try to entice borrowers into such loans before the new requirements are introduced. ``We would seriously question the consumer benefit of this surge in honeymoon loans," he says.
Mortgage providers may also seek to impose, or increase, fees that are not captured by the comparison rate. Pay attention to any fees for redraw facilities and early repayment penalties before signing a loan.
Doing your homework
First-home buyer Sharon Dumigan decided to steer clear of honeymoon deals when she was choosing the mortgage for her apartment in Gladesville, Sydney.
Ms Dumigan, a 31-year-old marketing professional, says she wants to pay off the mortgage on her two-bedroom apartment within 10 years, so her priority was finding a highly flexible loan.
``Often in the first couple of years there is only a certain extra amount (mortgages with honeymoon rates) will allow you to pay off," she says.
As well as doing some of her own research, Ms Dumigan listened to the advice of friends, who cautioned her against being locked into fixed rates.
``Lots of friends with mortgages had said they would have been much better off if they had a (variable rate) mortgage with repayments (that were not fixed)," she says.
In the end, with the assistance of a Mortgage Choice broker, she signed up with St George Bank for a standard variable rate loan at 5.97 per cent.
``I quite liked the sound of that product. I've been banking with St George for quite a long time and I had a car loan with them years ago," she says.
Apart from flexibility, the loan also fits her criteria for fees. Because she was eligible for a professional package, she paid a $300 establishment fee, instead of $600. The ongoing fees are $5 a month. -- Christine Long
How it works
FROM July 1, new provisions of the Uniform Consumer Credit Code will require credit providers and finance brokers to show a comparison rate on any advertising of loans at an annual percentage rate. This includes internet, television and print advertising.
Failure to include the comparison rate on advertising material could lead to the lender being fined up to $500,000.
The comparison rate is designed to show the true cost of a home loan. It includes the interest rate, establishment fees and ongoing fees. It does not include government fees and charges or fees that depend on the borrower's banking patterns, which could include redraw fees and break fees.
Prospective borrowers must also be given a comparison rate schedule with any application form for credit. This will show a comparison rate for that product for 13 different loan terms and amounts.
Credit providers and finance brokers must also display and make available
comparison rate schedules at their offices.
MORTGAGES - WHAT THEY REALLY COST BASIC VARIABLE HOME LOANS Company Rate % Upfront Ongoing AAPR* % ANZ Bank 5.97 $500 $8/mth 6.04 Commonwealth 6.06 $600 $8/mth 6.14 National 6.06 $600 Nil 6.09 St George Bank 5.99 $654 $8/mth 6.07 Westpac 5.99 $600 $8/mth 6.07 Aussie Home Loans 5.99 $820 Nil 6.03 Endeavour Australia CU 6.04 $842 Nil 6.08 IMB 5.95 $765 $8/mth 6.04 RESI Mortgage N/A N/A N/A N/A Wizard Mortgage 5.39 $760 Nil 5.3 PREMIUM VARIABLE HOME LOANS Company Rate % Upfront Ongoing AAPR* % ANZ Bank 6.57 $600 Nil 6.60 Commonwealth 6.57 $450 $8/mth 6.64 National 6.56 $600 $8/mth 6.63 St George Bank 6.57 $654 $5/mth 6.63 Westpac 6.57 $600 $8/mth 6.65 Aussie Home Loans 6.45 $820 Nil 6.49 Endeavour Australia CU 6.49 $842 Nil 6.53 IMB 6.57 $765 Nil 6.61 RESI Mortgage 5.85 $655 Nil 5.88 Wizard Mortgage 6.22 $760 Nil 6.26 EQUITY VARIABLE HOME LOANS Company Rate % Upfront Ongoing AAPR* % ANZ Bank 6.57 $500 $150/mth 6.67 Commonwealth 6.57 Nil $12/mth 6.65 National 6.71 $600 $250/pa $6.87 St George Bank 6.67 $754 $10/mth 6.77 Westpac 6.72 $600 $10/mth 6.81 Aussie Home Loans 6.56 $820 $150/pa 6.67 Endeavour Australia CU 6.49 $842 Nil 6.53 IMB 6.67 $765 Nil 6.70 RESI Mortgage 6.80 $655 Nil 6.83 Wizard Mortgage 6.22 $760 Nil 6.26 * NOTE: AAPR CALCULATED ON $250,000, 25 YEAR LOANS, ASSUMING PRINCIPAL AND INTEREST REPAYMENTS AND INCLUDING MORTGAGE DISCHARGE COSTS. SOURCE: CANNEX
© 2003 The Age