Home Loans Australia – are you One of the People Being ‘punished’?

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Home loan exit fees have come under attack from Australian consumer watchdogs as interest rate hikes push consumers to refinance.

Banks and lenders have been accused of ‘punishing’ home owners and stifling competition in the Australian home loans market by watchdog Choice.

Home loan exit fees are charges home owners have to pay to their lender to get out of their current home loan, often when they are looking to get a cheaper loan to counter the effects of rising interest rates. These fees can come in the shape of a fixed fee or a percentage of the total loan, sometimes as much as 2%. Home owners can face exit fees of between a few hundred dollars and $2,500 depending on the size of the outstanding loan.

A spokesman for the consumer watchdog said: “Fees should not punish consumers who are simply looking for a better deal in response to rising interest rates.”

The spokesman added: “Vigorous competition between lenders will only happen if consumers can switch institutions readily. Yet the range of fees lenders charge is designed to lock consumers into a mortgage product for one to five years.”

Choice has pointed out that bank profits from fees on home loans have increased on average by 13% per year over the last decade, with this accounting for $820 million in 2006. This is around one quarter of the banks total fees income from households.

“Exit fees, which include so called ‘deferred establishment fees’ should be limited to the loss incurred by the lender. Australian consumers pay more in home loan fees than borrowers in the UK, New Zealand and Canada,” added the Choice spokesperson.

Australian bankers have countered the accusations of poor competition in the home loans market, arguing competition is in fact extremely strong.

The Australian Bankers Association (ABA) contends that there are no real obstacles blocking consumers from refinancing their home loans. They say this is borne out by figures released by the Australian Bureau of Statistics which show around 1 in 3 new home loans are taken out by home owners who are refinancing.

The ABA also says home owners have been shielded from much of the effects of the credit crunch caused by the US sub prime lending crisis. The credit crunch has seen lenders charging consumers more for credit and being more choosy about who they lend to. This has made getting credit harder and more expensive for consumers with poor credit ratings.

The credit crunch has come about as a result of banks having to pay more for the money they borrow from the big financial institutions. While the problem stems from the US it is affecting banks right across the globe, from Australia to the UK.

The ABA says it believes Australian banks have protected consumers from the worst affects of the credit crunch by only passing on half of the banks’ increased costs to consumers.

Also it believes home owners are paying around 2% less for their home loans than they would have been if the banks had not cut interest rates off their own backs in the 1990s.

By : Tristan Dunston