In a package announced last week which included a variety of different banking reforms, the Treasurer Wayne Swan revealed the Government's proposal to abolish home loan exit fees. This package in its entirety was put together to afford Australian consumers greater flexibility and choice when it comes to their banking.
Under the reforms proposed by the Treasurer, home loan exit fees will be abolished on all mortgages taken out from July 1, 2011.
In many ways, the package will be a win for consumers. I have found it to be quite unfair that after working so hard and for so long (many people pay off their mortgages over a period of more than twenty years), consumers should be hit with often significant administration charges for ending their mortgage contract.
In other cases, the existence of exit fees also means that people cannot take advantage of better deals that are released onto the market. When you enter a contract that lasts for such an extended period as is the case with a mortgage, it is not surprising that improved offers become available.
Essentially, the abolition of home loan exit fees should give consumers more freedom to move between mortgage options as lending conditions change over the life of a loan. In turn, this could go some way in forcing greater competition in the banking sector.
And while consumers should benefit from this increased competition, I would say that it will also be prudent for borrowers to remain vigilant when comparing mortgage products after July 1 next year. Unless extra legislation is introduced to prevent banks from bringing in different charges, the reality may be that consumers are faced with a variety of new costs when it comes to searching for the best mortgage deal.
I'm not saying that these costs will outweigh the benefits of the abolished exit fees, but it may be the case that the basis for the comparison of different mortgage options will change. Consumers need to understand that banks could decide to implement other charges in order to make up for the lost exit fee income.
In any case, increased competition within the banking sector is a good thing as it should help to make it somewhat easier for people to obtain better financing for home purchases. And the cutting of exit fees does have the potential to save Australian borrowers substantially. I would just encourage consumers to remain abreast of the issues and take advantage of the opportunities to save on costs that the reforms will provide.