Under the Fair Trading Act, businesses in New Zealand can’t mislead you with false information in advertising or about pricing.
For several years, many NZ-based banks have been processing re-fix requests using direct ‘digital’ channels.
Previously, to get a good deal on your mortgage, you’d have to pretend to leave (often through the adviser), to negotiate a discount off the advertised rates.
Many direct borrowers didn’t want to do this, and some had no idea it was even an option. The result? Only some who asked the right way, obtained discounted interest rates, and everyone else paid carded rates. The benefit of the change to digital offers now, is that customers can skip to the end, cut to the chase, and accept what they’ve been told, is the best they can get.
The challenge is, how do we know it’s the best rate available when we’re not encouraged to seek independent advice?
I’ll define a few things here…
Re-Fix: When you take out a mortgage, one of the options you have is to ‘fix’ the interest rate. Typically, this is for a period of time between 6 months and 5 years. For this period of time, you have a guarantee from the bank they won’t change the interest rates. A fixed rate term, is therefore the period of time where the interest rate is guaranteed. At the end of this term, you’re given the option of re-fixing. *Note this is different to the loan term (typically 30 years at the start) and the interest only terms (if applicable).
Digital channels: Presumably to streamline operations, reduce costs, and ultimately lead to better outcomes (hopefully!), banks over the past 5-7 years have been converting some of their ‘loan maintenance’ requests on to online processes. Often 1-2 months before your fixed rate term expires, you receive a text, an email, or notification on your app or online banking. It’s very convenient. This notification directs you to a set of easy to select interest rates for another period of time.
There’s a question around misleading pricing here, as well as placing the customer needs first.
Here’s an example:
The misleading ‘issue’: Have a think about this – Is the little blue ribbon misleading, or likely to mislead a person of ‘average intelligence’? I my eyes, it would appear as though the online rate is the cheapest based on this blue ribbon – that’s what I occasionally hear from borrowers too.
The image above was forwarded to me by an actual client recently. They followed the best practice advice we give all our clients, which is to book a free 15-min chat with us, before making a decision. As the 5 year rate they wanted was available elsewhere for significantly less, we got involved, and obtained a discount which saved them over $7,000 in interest over the 5 years.
How many believe the interest rate their bank offers is ‘the best deal’ and don’t bother?
The advice ‘issue’: Re-fixing your mortgage, in our view, is actually a significant financial decision. For all our clients, we recommend a 15-min phone call before re-fixing, after they’ve read a detailed break down on the pro’s and con’s of several strategies one could employ. The issue with making things more streamlined and automated from a lenders perspective, is that occasionally it may lead to sub-optimal outcomes for borrowers. The value of advice cannot be measured in terms of convenience, so allowing customers the opportunity to seek advice around these touch-points are critical.
There’s a massive benefit for borrowers in fixing their mortgage on the fly like this to be fair, especially if they know what they’re doing (ie they don’t require advice), and they know where the market’s at (offers from other banks). The challenge is a behavioral one – if banks make it easier to come direct while simultaneously making it harder to receive advice and support of independent parties, I struggle to see how this leads to good outcomes for borrowers.