Thanks to the new Australian Consumer Law (ACL), ASIC is now able to ban any unfair term in a standard consumer contract and has the power to take action on any fee it considers to be unconscionable.
In terms of mortgage early exit fees, ASIC’s new powers aim to address excessive early exit fees that may be deterring consumers from switching to another mortgage. ASIC will also be able to seek refunds on behalf of consumers who challenge unfair early exit fees.
But what, exactly, determines an unfair fee? According to The Australian Bankers’ Association (ABA) chief executive, Steven Munchenberg, early exit fees for mortgages are a necessary evil and not overly onerous.
“Banks achieve low entry costs by deferring some of the costs of establishing a mortgage and only charging those customers that change their mortgages in the first few years,” he says. “Keeping up-front mortgage fees lower benefits all customers and supports customer switching. The effect of deferring these up-front fees, for example legal service fees, is that it reduces the cost to the customer or setting up a new loan at a time when they are incurring many other costs.”
However, data provided to ASIC by Fujitsu Consulting suggests that Australian mortgage fees have increased over the past 20 years. From 1995 to 2007, the total annual fee take against the combined Australian ‘mortgage book’ has increase from 0.67% to 1.39% annually. Early termination fees taken as a proportion of the overall fees have also increased from 19.31% to 41.83% over the same period.
According to the research, as the interest rate net margin for Australian loans has decreased it has been accompanied by a corresponding increase in the fees charged by Australian lenders.
Moreover, Australian mortgage fees are high when compared internationally. Research published by Fujitsu Consulting & JPMorgan has found that Australian consumers are forced into a trade-off between interest rates and fees.
How does this affect me?
For consumers looking to switch and are worried about high early termination fees, ASIC is on the warpath against any lender who charges what they consider to be in excess of a ‘reasonable estimate of the credit provider’s loss arising from the early termination or prepayment of a loan’.
If you are looking to refinance, it may be worth your while to hold off in the short term as ASIC works with the banks to determine whether their fees are in line with the new regulations.
For new borrowers, make sure you check out how much your lender charges in fees before you sign on the dotted line. An informed choice is a good choice.