Big savings from mutual lenders but little customer awareness: Australia Institute report

Credit unions, building societies and other mutual institutions offer significant mortgage savings, but the majority of Australians are unaware of these benefits, according to a new survey by The Australia Institute.

Credit unions also have to battle the major banks, which collectively spent $1 billion on advertising in 2011 and have just reported collective annual profits of $23 billion.

In addition, since the GFC, many borrowers have sought the security of having their mortgage with a major financial institution.

The results of the survey come as borrowers await today’s Melbourne Cup cash rate decision by the RBA. Should the RBA cut the cash rate, as is tipped, speculation will then turn to how much will be passed on to borrowers by the major banks and other lenders.

The Australian Institute survey finds that members of mutually owned banks, credit unions and building societies are estimated to save an average of 0.4 percentage points on their mortgage interest rate.

Data from Canstar reported in the survey shows that standard variable interest rates for the mutuals have been consistently lower than those of the big four banks in recent years.

The average standard variable rate (SVR) for mutuals over the period of June 2009 to August 2012 was 6.73%, which is 40 basis points lower than the average SVR of 7.13% from the big four banks.

For an average loan, this generates savings of $76,417 over the life of the loan and reduces the repayment period by three years.

There are 103 financial mutuals in Australia controlling assets worth a combined $83 billion. Australia has the third largest mutual banking sector in the world, after the United States and Canada, with mortgages and retail deposits the staple offering of the sector. The biggest of these is Credit Union Australia (CUA) with $9 billion in assets and 415,000 members, followed by Heritage Bank and Newcaste Permanent.

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However, community awareness of the sector runs far behind community reliance on the sector.

According to The Australia Institute survey, despite the fact that 79% of people are members of a co-op (this includes non-financial institutions like the NRMA, RACV, AustralianSuper and even the Co-op Bookshop) only three in 10 Australians could name a co-operative or mutually owned enterprise, and only 16% of Australians believe that they are a member of one.

Despite their lack of awareness of alternatives, the survey found that the vast majority of Australians believing that privately owned for-profit companies are more interested in shareholder profit than customers (90%), that large shareholders have too much influence (88%) and that corporate executives are overpaid (92%).

“Millions of Australians could spend less on their mortgages, spend more in retirement and save a small fortune when they need to go to the doctor, buy a book or buy some wine. At a time when many people are talking about the rising of cost of living it is surprising that more Australians don't switch to a member-owned alternative,” says Australia Institute executive director Dr Richard Denniss

He says that while many Australians have expressed an alternative to the bigger financial institutions and co-operatives do deliver “high quality products at low prices”, the institute’s report suggests these institutions “have not done a great job of explaining to their members how they do it and why it matters”.

The report says there are opportunities for mutuals to better explain their ownership structure, and its benefits, to their existing customers and better explain the contribution that mutuals and co-ops make to the community.

It also calls on government ministers and government departments to “pay greater attention to the benefits to consumers and communities that flow from co-operatives”.

“They should also do more to overcome the pragmatic or psychological barriers that prevent consumers switching to mutually owned enterprises,” he says.

The Australia Institute is an independent public policy think tank based in Canberra, funded by donations from philanthropic trusts and individuals, memberships and commissioned research

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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