Puzzle Finance Blog


More power to the people



New legislation might have the banks in a tiff but it's a winning situation for customers.

ONCE upon a time you had to put on your smartest clothes and most dependable demeanour - and a wedding ring if you were a woman - and make an appointment with the bank manager to apply for a loan.

It was a nerve-racking experience and the power was all theirs.

Today, the power is still theirs - or their minions', in the case of a loan application - but less so than a week ago.

You'll recall all the hoo-ha about the banks' failure to cut mortgage interest rates by as much as the Reserve Bank of Australia did during the global financial crisis. While the official rate fell 4.25 percentage points, the average variable home loan rate went down only 3.7 percentage points.

Meanwhile, the penalties for breaking your loan contract to move to a more competitive lender were in many cases prohibitive.

And while we were all busy being outraged by the above, they got away with only cutting credit card interest rates by an average of 1.2 percentage points. What's more, in many cases they apply our repayments in such a way that we pay the most interest possible.

Well, the government has now finalised its long-awaited crackdown.

Firstly, legislation banning mortgage exit fees passed into law last week. This applies to home loans taken out after July 1 but don't forget, the regulator ASIC came out months ago with an edict that such fees need to be fair and appropriate, which means where there are penalties, they should now be reasonable.

The potential savings should make this well worth it. By switching a $300,000, 25-year loan from the big four's average variable rate of 7.79 per cent to the best available rate of 6.79 per cent (see the Best Buy tables on page 10), you'll save an astonishing $58,000 interest.

Of course, you could continue to donate this money to your lender. That's really your call.

As an aside, the government has also just published draft legislation expanding the way banks can raise cash - allowing them to issue covered bonds - that should cut the borrowing costs they constantly complain about, which may flow through to lower interest rates.

The credit card reforms, which have now been introduced into parliament, stop banks requiring you to pay off the lower-interest rate portion of your balance before any higher-interest one.

They will apply where, for instance, you have taken advantage of a no- or low-rate balance transfer but then spent more on that new card. This is how the banks fund these deals - levying an eye-watering interest rate on new spending until you pay off your entire transferred balance. They will now have to apply repayments in the opposite way: from highest interest to lowest interest.

You'll also stop getting offers in the mail to increase your limit. While these might appear flattering, the goal again is getting you to rack up maximum interest.

And banks will no longer be able to charge a penalty for going over the limit.

Probably best though, each statement will specify that by only making the minimum repayment, clearing your debt will cost you X money and take you X years. Modelling for AFR Investor by Cannex shows that if you carry over a $2000 balance, you will still have debt 25 years later if you have an interest rate of 16 per cent or more, an annual fee of $24 or more and a minimum monthly repayment of 2 per cent or less. Pretty common conditions.

All this doesn't mean it will become easier to get a loan or credit card. It might become harder as banks seek to maintain profits and get more selective about who they lend to - and balance-transfer deals are disappearing fast.

But it does mean there will be less funny business when you do.

Posted by Nicole Pedersen-McKinnon - The on 27th March, 2011 | Comments | Trackbacks
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