Home owners held hostage by exit fees

HOME buyers trying to escape their loans early are being hit with extortionate fees of up to $7500, Australia's corporate watchdog has revealed.

Amid widespread anger over interest rate rises exceeding those imposed by the Reserve Bank, a report by the Australian Securities and Investments Commission reveals that Australian home buyers face some of the highest "early mortgage termination" fees in the world — as well as a complex array of other fees and charges.

Early termination fees have been blamed for dampening competition in the banking sector by making it prohibitively expensive for disgruntled home owners to switch to cheaper loans.

Confirming that banks and their smaller rivals are reaping profits from the practice, the report found that early mortgage termination fees now account for 42% of total fees raised by the sector — more than double the 19% share in 1995.

Some of the worst offenders are the small, non-bank lenders. A home buyer prematurely ending a $250,000 basic mortgage after three years from these lenders could be hit with an exit fee of $7580, or $2665 on average, the report found.

After adding other fees and charges, such as account-keeping fees and establishment fees paid over the three-year period, some home buyers with loans from the non-bank sector are paying as much as $9000 — equivalent to $250 a month.

Elissa Freeman, senior policy officer with consumer group Choice, said the report confirmed that lenders had been creaming off a huge — and growing — contribution from early termination fees, often locking consumers into bad loans.

"It's pretty clear that lenders have been benefiting from early termination fees at the expense of consumers," she said. "They either lock consumers into a poor product or consumers end up being ransacked to get out of a loan that is no longer good on the market."

Treasurer Wayne Swan said the report, to be released today, would "underpin future efforts to ensure full disclosure of fees and boost competition in the banking sector" — highlighting a dramatic variation in fees and charges.

"We understand there is widespread concern in the community about various aspects of the mortgage industry — including the conduct of mortgage brokers and the level of fees charged on mortgages," Mr Swan said.

Mr Swan has introduced voluntary "bank switching" measures, including a service requiring banks to provide information on all direct debits and credits to a customer's new bank. But the Government is threatening banks with tough mandatory regulations if they fail to clean up their act.

The Sunday Age believes Treasury is examining a host of new laws, including standardising types of fees and setting limits on fees and charges.

Among the major banks, the maximum exit fee charged over three years was $3750 for St George's "no deposit home loan", with an average of $1081.

Customers holding loans with smaller banks such as HSBC, Citibank, ING and Macquarie, paid a maximum of $1500 (for BankWest's "mortgage shredder") or $703 on average.

But when other fees and charges are added — including start-up fees, ongoing account keeping fees, ATM fees and redraw fees — costs jump dramatically. One non-bank lender, AIMS Home Loans, imposed fees and charges equivalent to more than $9000 for a basic loan exited after three years.

The Australian Bankers Association has argued there are "no significant switching problems" in the home lending market, pointing to high rates of home loan refinancing as evidence.

The ASIC report found Australians switching early pay nearly five times more than buyers in the US and Britain.

The Age | Josh Gordon | 6 April 2008