Non-bank lenders say mortgage exit fees are vital

Non-bank lenders are dreading the end to early exit variable mortgage fees ban, which comes into effect on July 1, 2011, following a Senate vote to uphold the ban. 

The ban will make life even harder for struggling non-bank lenders, who have used exit fees to hold onto customers and compete with the major banks.

Non-bank lenders charge an average exit fee – a penalty for customers who leave a lender after the first three or five years of a loan – of $1,900. However, some lenders charge as much as $7,000.

All of the major banks except Westpac have now scrapped their exit fees, which were between $700 and $900. Westpac will have to step into line by July 1.

The market share of non-bank lenders has plummeted since the start of the global financial crisis in 2007, when global securitisation markets – the major source of funding for non-bank lenders – dried up.

The campaign for an exemption to the ban, which the Senate did not agree to, was led by the Mortgage & Finance Association of Australia, which represents non-bank lenders and mortgage brokers.

It claims without exit fees the non-bank lenders will find it hard to compete with banks and that with less competition, interest rates will increase.

"It became clear during our lobbying that there are many in Parliament who share our concerns that the breadth of competition in the mortgage market needs to be enhanced in order to keep interest rates low," MFAA chief executive Phil Naylor says.

"Non-bank lenders are synonymous with bringing down the margin on home loans in Australia.”

The MFAA calls the exit fee ban misguided, quoting its survey of 1,000 borrowers, which found that just 1.7% listed exit fees as a concern.

Mortgage broking franchise Mortgage Choice lists more than 10 small lenders on its panel.

Spokeswoman for the group Kristy Sheppard says smaller lenders do not enjoy the economies of scale of the big banks and exit fees helps them to compete by reducing establishment fees on home loans.

"We are disappointed with the decision because it may have the unintended consequence of reducing competition in the mortgage market," she says.

Other critics of the bank include Aussie Home Loans.

Founder John Symond built up the Aussie brand in the late 1990s on the back of securitised funding, which allowed it to offer mortgages at better rates than the major banks.

Not only will this regulation make it easier for borrowers to secure a better loan, but it will make the lending market more competitive, particularly among the major banks. Banks and lenders will now have to offer more competitive rates and conditions in order to secure and maintain borrowers.

In a time when housing affordability is a major issue, this is a positive step forward and will no doubt be welcomed by home owners.

Brent Pullar, estate agent and owner of Harcourts Frankston, says the ban is a positive step forward in a time when housing affordability is a major issue.

Pullar says the ban will make the lending market more competitive, “particularly among the major banks”.

Damian Smith, CEO of mortgage comparison website RateCity, has welcomed the ban, saying it will help some borrowers switch to better deals without being penalised and drive up competition.

However, he has played down the impact of the ban, saying other fees and charges will deter many borrowers from switching, particularly lenders mortgage insurance.

LMI is required for loans where more than 80% of the value of the property is borrowed.