Let’s talk about them exit fees

by

Reports today that the government looks to ban mortgage exit fees as part of a raft of measures to improve competition in banking. Let me make some brief points about all this.

  1. The financial sector and banks are too important to be subject to a ‘raft of measures’ emerging without process and an accumulation of the evidence. The issues are deep and are a mixture of competition, regulatory and financial stability issues. No one has all of the answers and there is no rush to close the book on this. Only a full inquiry into the system will cover the basis. Anything else should make us nervous that we are playing politics rather than policy.
  2. On the exit fees themselves, I would like to see the evidence on what the effect has been given that these have been banned elsewhere. The Age quoted Fujitsu Consulting on the magnitude of such fees. However, last year, Richard Hayes did a very effective demolition of that — something that should give us pause regarding the quality of the evidence being considered.
  3. Theoretically, removing exit fees from all mortgages will be a boon to those holding existing mortgages. If you can secure another mortgage from a cheaper provider that should give you a little bargaining power with your current bank. They will likely move you on to a discounted rate structure that does exist — usually for larger home loans. But there is an ‘if.’ What is the incentive of another bank to try and win you as a customer. If exit fees were a constraint, they were also a part of the ‘prize’ for the bank — the ability to charge you higher interest rates into the future without fear of you leaving. Sans exit fees, that part of the prize is gone. What do you think might happen to the fees you pay when taking out a loan? Chances are that they will go up. I suspect there will still be some competitive benefit from banning exit fees (although I have no direct evidence to support it) but, in reality, you need to look at all fees and not just exit fees if you are getting serious about this.
  4. Given all this, please read point 1 again.
3 Responses to "Let’s talk about them exit fees"
  1. Josh,
     
    I gather this is the point of the reform – They’re not trying to make “exit fees” evaporate, just make them pre-paid.
    That’s still a perfectly valid position – It makes the fee more transparent and easier to include in comparison rates (since it now forms part of the establishment fee), and provides competitive pressure to reduce those fees (since it’s the acquiring bank charging the fee they’ve got every incentive to reduce it/negotiate with the customer, whereas the departing bank has no such incentive)
    Makes sense to me

  2. <blockquote>What is the incentive of another bank to try and win you as a customer.</blockquote>
    Last I checked, it was the chance to borrow money at 6% and lend it at 8.
    Given the exceedingly low rate of mortgage defaults in Australia, that doesn’t strike me as a bad business to be in

%d bloggers like this:
PageLines