Exit fee clampdown could hurt competition, says expert

Government plans to clamp down on home loan exit fees will make it harder for smaller lenders to compete, it has been suggested.

Deloitte economic adviser Dr Henry Ergas noted that while the removal of exit fees will make it easier for customers to compare home loans and switch provider, it will also see some banks lose their best customers, leaving them just with the bad ones.

Speaking to the Australian, he said: "At the outset, when a bank takes on a customer, there is some uncertainty about the customer's future income trajectory and what the future value of the asset against which they are lending.

"The lower the switching cost to good customers, the greater the risk that the bank will be stuck with the lemons."

Meanwhile, Professor Deborah Ralston, director of Australian Centre for Financial Studies, told the newspaper that the decision to place limits on exit fees was the latest in a series of regulatory decisions by the Labor Government that had made life harder for smaller financial institutions.

She commented that smaller lenders have to invest much more than the big banks to win each customer, meaning that they rely on keeping them for several years in order to turn a profit.

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