Exit fees are officially banned
The proposed legislation to ban home loan exit fees was officially passed by the senate yesterday (23/06/2011). There were 35 senators for and 35 against the ban, with the deciding vote going to Senator Fielding who voted in favour of the ban. It will now become law from the 1st of July 2011.
What this exit fee ban means in practice:
From the 1st of July 2011 you will be able to fully repay and close your loan without incurring any lender imposed exit fees. This would normally occour when you either sold your property or refinanced your loan to another lender. Adminstration and government fees are not included in the ban so it will still cost at least a few hundred dollars to switch lenders. Fixed rate break costs are also not included in the ban.
Exit fee ban, good or bad for the consumer?
I personally am at odds with most of my fellow mortgage brokers in that I support the exit fee ban as I think it will be good for the consumer.
It may not be good for non bank lenders but really they are such a small part of the lending landscape now that I don't really think it matters all that much. I am all for competition but the non banks were not providing this before the exit fee ban so I don't see how things will change with it in place.
Traditionally non banks lured borrowers into their loans with cheap rates but with very large early exit fees. Nothing wrong with that in theory however what happened in the wake of the GFC with non bank lenders pulling out of the market and then increasing their interest rates well above other lenders proved the model was in my opinion broken. For example borrowers who took out loans through non banks such as Rams, Macquarie Bank and GE were stuck with the choice of paying much higher rates than they should have been or refinancing their loans and paying up to 3% of the original loan balance as an exit fee. For a $500,000 loan this could be up to $15,000. If nothing else this is why exit fees had to be banned in my opinion as there were literally thousands of borrowers in this boat and many still are in this predicament.
So in summary I think the exit fee ban will be good for consumers. Another initiative that I would support would be the portability of bank accounts so we can finally break the inertia that stops so many people from seriously considering changing lenders!
Thanks for reading,