This is a tale about the big picture and the small picture.
Paul Keating likes pulling the levers and looking at the big picture.
When Treasurer he used interest rates as one of his main levers, though many economists would argue he should have used the steering wheel of reduced government spending for more controlled driving of the national economy.
It appears the Federal Government is at it again, using interest rates as its main lever of economic control.
The Government obviously thinks the squeals from voters who might lose from cuts in government programs are louder than the squeals of voters who lose from higher interest rates.
This is because the squeals of those affected by increased interest rates are somewhat muffled. Some people with savings actually benefit from increased interest rates. Other people might blame the banks. Also, the banks might absorb some of the increases for the chief squealers (home-borrowers) while passing on increases to commercial borrowers.
The Government has also said it hopes that competition among the banks and between the banks and other lenders might enable the underlying market interest rate to go up without all of it being passed on commercial and, more importantly, home borrowers.
And, indeed, there is some evidence of that happening. We have seen the personal finance columns graced with tables comparing the interest rates of the Big Four banks and a raft of cut-rate entrepreneurial companies who have entered the home-loan fray. The cut-rate companies, of course, are not carrying two large burdens that the banks are carrying. One is the hangover of debt from the 1980s and the other is a chain of suburban branches that have to be staffed and the rent paid.
The cut-rate companies can offer rates 1 or 2 per cent lower than the Big Four.
Now to the small picture. Recently I had to refinance my home loan, for reasons that don’t concern you. (Actually, I was engaging in a bit of rampant anti-social capitalism in the worrying knowledge that no government is going to provide for my retirement).
The exercise convinced me that state governments are putting a stick in the spokes of the great wheels of the finance industry. They are undermining the full force of competition by making it very difficult for people to swap from one bank to another to take advantage of cheaper rates.
The banks in turn have tried to overcome this, but at a cost to existing customers.
If there is to be effective competition, the Federal Government will have to put a bigger rocket under the states than the Hilmer report.
Let me explain.
I was with one lender who was charging 1 per cent more than I could get elsewhere. For ease of calculations let’s say my mortgage was $100,000. That is an extra $1000 a year. Some people will not make the effort. But bear in mind $1000 is like a pay rise of $2000 a year after tax; and not many employers are giving that without a lot of effort.
But what happens when you try to transfer the $100,000 mortgage to a cheaper lending institution? For a start, Hull’s Second Law applies: whenever large sums of money change hands there you will find greedy governments and lawyers with their hands out for a cut.
With a change of mortgage, for example, the following apply:
Financial Institutions Duty of 0.1 per cent as the $100,000 goes into a bank account (maybe twice). I call this the Electronic Khyber Pass tax; you have to go through the pass and you get pinged.
Registration of discharge of mortgage: $60 (varies in other states).
Fee for former mortgagee to prepare discharge papers and attend settlement (varies up to $200).
Establishment fee for new accounts and new mortgage (varies to $1000).
Registration of new mortgage: $60 (varies in other states).
Stamp Duty: up to $350 in the states. Not applicable (yet) in the ACT.
It gets worse. Because the states and territories have inefficient uncentralised records on land titles, building and other title searches, the new mortgagee usually has a lawyer to look after their side of the transaction.
Different mortgagees have different requirements. The following is typical:
Valuation; survey certificate; building report; insurance certificate with mortgagee’s name on it; answers to a litany of questions as to whether you are bankrupt, subject to Family Court judgments and whether the fences are on the boundary or whether any state or local authority has issued any orders about roads, electricity, water, fruit trees and so on.
This means you might need a lawyer to do you part of the work.
Every one of the these searches and questions requires a fee, or time to find things out.
In short there is often not a great deal of change out of $2000. That is two years’ worth of saved interest at 1 per cent on $100,000.
However, many mortgages are much less than $100,000 so the costs take longer to recoup. For example, it is four years’ for a $50,000.
In that time, of course, the bank you have just moved to might raise its rates to higher than the one you have just come from.
Many borrowers therefore are not very inclined to move. As a result some banks are enticing them to move with very attractive deals for newcomers: National Australia and State Bank for example are offering up to 3 per cent off for the first year. That will pay for the costs of moving accounts inthe first year.
And some banks have tricks to entice all your accounts across and to keep you there _ such as penalties for early discharge or lower transaction fees if you have more than one account.
At first blush it just looks like banks offering enticements to new customers. But it runs deeper than that. It is banks paying for inefficient state governments and lawyers who impose financial and practical impediments against people moving mortgages from one bank to another. The costs of those enticements, of course, are passed on one way or another to the whole body of the banks customers and shareholders.
It is simply no good having efficiency gains in one part of the economy (banking) if other parts of the economy are inefficient (state administrations and lawyers’ practices). It is no good being the partly clever country.
Lawyers’ practice is inefficient because it is extremely risk averse. It may be justifiable when each transaction is viewed separately, but overall it is a severe impediment to people moving mortgages to a better bank.
Lawyers acting for the new mortgagee insist on asking questions about fences on boundary lines and insisting on survey certificates and the like even though the exercise might have been done only a few years ago by an equally prudent existing mortgagee.
Lawyers’ fees, of course, are high partly because the inefficiency of state and territory administrations make it harder for them.
We need greater computerisation and centralisation of records about land holding so that one search reveals all, including title, building, rates and notifications by state authorities. The Federal Government has done it with the 800,000 Australian companies right down the details of changes in directorships and annual accounts. The states should do the same with land.
Stamp duty on mortgages should be abolished (and not introduced in the ACT). FID should be capped lower.
Mortgage brokers should be able to compete with lawyers for mortgage conveyancing work and somehow we should encourage mortgagees to be less stringent in their requirements. In other words, they should not pass on the paranoia contracted in the 1980s when lending to the big spenders to humble suburban home borrowers.
Otherwise, competition in the banking sector will be partially thwarted as some banks will stay smug in the knowledge that it is just too hard for the bulk of their customers to change banks.