Exit fees ban will hamper competition: MFAA

The Government has banned mortgage exit fees, a step that it claims will boost competition – although some members of the mortgage industry say it will have the opposite effect.

The ban will apply to all new home loans from July 1, 2011, and Deputy Prime Minister and Treasurer, Wayne Swan, called it a victory for Australian families.

“Exit fees can be so high that they completely wipe out the savings from switching to a cheaper mortgage with another lender,” he said.

The Australian Securities and Investments Commission had the power to pursue banks over unfair exit fees on both new and existing mortgages, said Swan.

“The regulator is also able to stop banks re-badging an unfair exit fee as another type of charge,” he said.

The ban has been opposed by the Opposition, and Shadow Treasurer Joe Hockey has said that banks would recoup lost revenue in other ways.

Chief executive of the Mortgage & Finance Association of Australia, Phil Naylor, said the ban would have the opposite effect the Government intended.

“We have always opposed a ban in mortgage exit fees and will continue to oppose it as it will actually reduce competition,” he said, adding that it would negatively impact small non-bank lenders.

Naylor said the ban would apply to ‘deferred establishment fees’, which were a popular mechanism often used by smaller lenders that offered lower interest rates and no upfront fees as long as the borrowers stayed with the lender for between three to five years. Naylor said these arrangements had been popular with consumers and good for small lenders, yet the ban would disallow them and push business to the big banks.

Naylor said there had been a fair amount of consultation and was disappointed at the Government’s decision to ban mortgage exit fees, which would result in unintended consequences for the mortgage industry and consumers.

“We haven’t given up but we have not been successful in convincing Government that small lenders and consumers will be hurt,” he said.