Banking Review

Removing exit fees not the answer says Mortgage Choice chief

NEWS

Removing exit fees on mortgages will damage competition and result in lenders simply shifting fees says Michael Russell, chief executive officer of broker Mortgage Choice.

“The issue around removing exit fees is one the Government needs to tread carefully on,” says Russell. He argues most of the non-bank lenders that were charging unconscionable fees were driven out of business by the global financial crisis, and what’s left are fees designed to ensure lenders receive a “reasonable return” over the first three years of a loan.

The Government is preparing to bring forward a number of proposals from the Australian Securities and Investments Commission, which has been consulting with stakeholders on exit fees since June. Under the new National Credit Code, early exit fees which are unconscionable can be annulled or reduced by a court.

ASIC undertook a review of mortgage entry and exit fees in 2008. It found fees were on the rise and that early termination fees as a proportion of the overall fees increased from 19.31 per cent to 41.83 per cent between 1995 and 2007.

But Russell says a blanket removal of exit fees would lead lenders to “front end” the fees.

“Quite often non-banks have put exit fees in place to really stimulate their pricing at the point of sale,” says Russell. “If you remove those exit fees you risk the non-banks in particular having to front end those fees and what you will do is drive down competition further.”

Instead, Russell says the Government should focus on incentives to stimulate foreign banks and support for non-bank lenders to improve competition.

You can read the full interview with Russell in the November/December edition of Retail Banking Review, out Friday.