… both sounding like one and government policy. Usual scenario: (1) RBA changes interest rates, (2) banks immediate react but don’t do the same thing — almost always passing on less or, apparently, taking more — (3) Treasurer says consumers should use their feet and switch banks; (4) consumers work out that is costly; (5) journalists call me to so I can be quoted saying the same thing; (6) nothing gets done. Today’s step (5) journalist is Peter Martin.
The problem with bank switching costs is that to minimise them likely requires all banks to implement common standards, technologies and maybe even some new financial products that would enable this. The latter would be, say, mortgage products whereby there is an underlying secured stream of income from the mortgage but when a customer switches, they switch the front end or residual holder of the variable stream of returns as interest rates vary. In each case, it is likely to be better if either (i) the government mandates a right to switch, thereby, forcing banks to work something out or (ii) provides that means of switching themselves. The latter is a structural intervention into the market, not unlike the competition-enhancing policy behind the NBN, that will allow switching to be cheaply implemented. The costs could then be recovered through, say, stamp duty on the loans. Wow, stamp duty actually used to provide something related to the industry rather than a revenue grab from government. How radical is that?
Core Economics 
Joshua, the banks don’t want borrowers to switch institutions easily. In fact they have “Business Retention Teams” in place who’s job it is, to try to retain any client looking to move to another lender. If that can’t be done then they will purposfully delay the process in a “spoiling” operation by continually losing Discharge Authorities or finding some item of contention so that the process has to be restarted. All of the banks are guilty of this, with the NAB taking the sport to an art form.
The problem of moving banks is so bad, major banks now have an insured option where the new bank simply pays out the previous lender with a slight overpayment, just to get it done on time. They are called “Rapid Refi” or similar names. The documentation is sorted out later.
Effectively this leaves the new bank without real security for the period between settlement and when the docs are transferred. During that period the loan has a special insurance policy against loss. That is an added cost that of course is paid by borrowers either individually or collectively.
Mortgages can indeed be bought, they are transferrable, but as they are not all standardised, the banks don’t want to end up with a hotch potch of different security instruments, and that is a valid concern. Obviously a move to a standard mortgage instrument common across all states would help, with appropriate legislation giving some support and safeguard to lenders.
But the real problem is this – banks look to achieve market share by “selling” their product at a particular rate that can be adjusted to suit their market share requirements. That is they discount to get a larger share, and once that has been achieved, they subtley increase the price to achieve a greater profit. Almost all mortgages are variable.
Therefore if the cost and effort of changing lenders was reduced to the minimum, borrowers would “wash across” from one lender to the next in a lemming like migration as rate variation appeared. Everyone wants a cheaper mortgage.
The government could move to make the transition easier and cheaper, and that would be beneficial. But to promote cost free movement between banks and encourage mass mortgage migrations will have an effect on the banks interest rate setting and marketing policy that MAY discourage setting lower rates, and we could all end up on a homogenous rate setting that works against competition between lenders, unless you could also put some other competition encouraging policies in place.
Basically the idea of putting a system in place where a new lender can buy the old mortgage from the old lender with minimal fuss could be streamlined to the benefit of all is an excellent notion, but much thought on the policy and implementation is needed or unintended consequences will arise.
Glad to hear your comments on stamp duty becoming a mere revenue grab. Sanity at last.
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Main reason you can’t switch easily is that pretty much every mortgage has exit fees up to the 4 year point. When the exit fee is over $1000 the interest rate saving needs to be decent (>0.5%) and likely to continue for years not months.
Being able to switch once every 4 years is terrible. MAybe if banks want long-term loyalty they need something like the RACV discount where they increase after 5 and 10 years. Once you’re at the 10 year discount level a competitor needs to seriously under-cut to get you to switch.
Peter, I’ve heard several peoples experience of trying to switch banks and the delaying tactics they go to to not release paper work etc…
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What always amazes me about residential mortgages is that we are required to sign up to a huge, long-term financial commitment with no guarantee on price: by which I mean the spread between the mortgage rate and the floating risk free rate.
In the UK, “tracker mortgages”, in which the spread is fixed, were popular for a while. I don’t think these mortgages are faring well (for the banks) currently though.
It is the lack of fixed-spread mortgages that is the real market failure, not the inability to switch the mortgage to another bank. It is only because the spread is not fixed that we rely on inter-bank competition to keep the spreads reasonable.
If a business wants to borrow long-term at a fixed-spread, it can do this (by issuing debt). So, why can’t a household?
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Peter:
But to promote cost free movement between banks and encourage mass mortgage migrations will have an effect on the banks interest rate setting and marketing policy that MAY discourage setting lower rates
Exactly the same arguments could (and probably were!) made about, say, switching mobile phone providers.
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kme – cost free movement of mortgages is a wonderful idea, but it involves statutory costs. legal fees, and commercial loss to the bank, so don’t think you won’t pay for that in a rate adjustment, just as you are probably paying for that MUCH SMALLER cost of moving phone providers through another mechanism.
I’m not against the idea, but regulators should be aware of difficulties and consequences.
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