No such thing as a true mortgage comparison rate, MFAA says
4 July 2007
Mandatory comparison rates (MCR) for home loans will always be misleading to consumers and should be abolished, the mortgage and finance industry’s peak body has said.
Chief executive officer of the Mortgage & Finance Association (MFAA), Phil Naylor, said: “MCRs are fraught and rarely provide a true comparison for consumers to accurately compare different loan products when choosing a home loan.
“Although MCRs are a great concept, their execution is difficult and flawed. Recently, financial product research firm, Cannex, called for regulatory changes to make the comparison rate a more accurate tool for comparing loans.
“But no matter how many changes were made to the existing comparison rate tool, it could never take into account all the different elements of each and every product out there.
“It is misleading to promote MCRs as providing the ‘true cost’ of a loan by simply combining fees and charges with interest rates.
“Costs such as exit fees or redraw fees and cost savings such as fee waivers are not included in the comparison rate, yet these are the individual features that influence the cost of a loan.”
Mr Naylor said although the inclusion of comparison rates in loan advertisements has been mandatory since 2003, the majority of consumers still struggle to understand them.
“A number of consumer studies, both in Australia and overseas, have found low levels of awareness and understanding of comparison rates and they have already been abolished in New Zealand,” he said.
“In fact, the latest BankWest/MFAA Home Finance survey shows a large proportion of respondents were confused about how comparison rates worked and sixty five per cent were unable to answer how the rates applied to them.
“It is alarming that comparison rates are presented to consumers as the yardstick for choosing a home loan when there are so many other important factors that need to be considered.
“Consumers must be aware that there is no single figure that can give a definitive comparison between products. Rather than impose the imperfect comparison rate on lenders, the government should focus on promoting financial literacy to Australians, starting in schools.”
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The Mortgage & Finance Association of Australia (MFAA) is the peak industry body providing service and representation to over 12,500 mortgage brokers, finance brokers, mortgage managers, mortgage lenders (bank and non-bank), and originators to assist them to develop, foster, and promote the mortgage and finance industry in Australia.
The MFAA has a website for consumers www.essentialsofborrowing.com.au which contains useful information for home buyers including guides to the mortgage industry, and a search engine to help borrowers find a local accredited MFAA member.
BankWest is a full service bank which originated in Western Australia in 1895 and services more than 660,000 customers. Nationally, BankWest promotes a range of products using cost-effective direct and third party distribution channels, including 24-hour telephone and internet services and mortgage brokers. In WA, BankWest is a market leader with about one quarter of all bank advances and deposits and an extensive network of branches.
BankWest is a wholly owned subsidiary of HBOS plc, one of the world’s largest financial services groups, with assets of about AUD$800 billion (₤380 billion). Standard & Poors short-term credit rating for BankWest is “A-1” and “A+” for the long term, providing customers with investment grade security.
For further information phone:
Phil Naylor, CEO MFAA (02) 8905 1301
Kerry McGregor, MFAA Marketing and Communications, 0414 955 899
Bridget Tombleson, Media Relations Manager, HBOS, 0407 084 359
Andrew Inwood, Principal, brandmanagement, 0425 339 888
