Australian government bans pre-payment penalties

Australian government bans pre-payment penalties

Australian Treasurer announced changes to finance laws, banning unpopular mortgage fees and cracking down on price collusion between major banks in a bid to boost competition in the sector.

Targeting Australia’s “big four” banks, the reforms ban exit fees (pre-payment penalties as they are known in Canada) on new home loans and allow the competition regulator to prosecute lenders for colluding on rates, after large hikes sparked an angry consumer backlash.

An additional (AUS)$4 billion dollars would also be injected into the mortgage-backed securities market under the reforms, Swan said.

“Building up competition in our banking system will ensure that interest rates are lower over time,” Swan told Australian newspapers. “It’s very important that we don’t let the big banks off the hook.”
Government opposition said the policy to abolish exit fees was more likely to hurt smaller lenders and do little to foster banking competition, since smaller lenders tend to have bigger exit fees compared to the Big Four banks.
“Smaller players won’t be able to do it so out with the exit fees and in with the application fees – other fees will go up because the smaller players need that fee income to remain somewhat competitive with the larger players,” said opposition treasury critic Joe Hockey.
Phil Naylor, CEO of the Mortgage and Finance Association of Australia told Mortgage Broker News’ sister website Australian Broker that Australia had missed a “golden opportunity” to develop an Australian version of the Canadian Mortgage Bonds systems, which Naylor said enables thriving and competitive non-bank lender sector to operate there.
He labeled the government’s promise to boost securitization funds “a mere drop in the ocean,” which does not deal with the long run competitive funding needs of the non-bank sector.
“The Federal Government’s investments pale to those made by the Canadian Mortgage and Housing Corporation which during the past three years has invested $300 billion in the National Housing Act Mortgage-backed Securities and Canadian Mortgage Bonds programs.”

Non-bank lenders also claim that a ban on exit fees or deferred establishment fees (DEFs) could mean less upfront commission for brokers, as well as higher interest rates for consumers.
Carrington National CEO Gino Marra told Australian Broker that DEF payments go to the cost of providing a loan, and that the banning of exit fees from 1 July next year could mean these costs are recouped through less upfront commission, or higher interest rates.

  • James in Whitby 2010-12-15 6:07:07 AM
    Here's a novel idea: why don't the banks create efficiencies and review their process BEFORE jumping to the conclusion that the only answer is to again cut broker commissions? Instead of huge bonuses, expense accounts, layers of (useless) management and trying to do 16 different things at once why not concentrate on doing mortgages WELL and hire A FEW people who can do the job? I bet the bank shareholders would be all over that idea in a heartbeat!
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