I. Introduction
Australia’s housing sector has long been characterised by relatively high homeownership rates and a predominance of variable-rate mortgages (Luci, Lawson & Roberts, 2003, Pg.1). This is why taking on a home loan is one of the common practices in Australia, and a lot of banks and creditors are involved in the market. There are a lot of factors in considering a home loan, namely the switching cost, and the most substantial of these switching costs is the exit fee.
This essay will explore further to define and identify switching costs in Australian home loan market, explain how said switching costs might increase power of suppliers in the market, and assume the expected effect on the price charged by the suppliers, and the profits they received thereafter.
II. Switching Cost in Australian Home-Loan Market
Switching costs are costs induced to economic agents when they change their suppliers; these costs originate from a host of reasons, economic as well as psychological (Kim, Kliger, Vale 2013, p.25). There are generally three sources of switching costs in Australian home loan markets. This essay will take on a home-loan example provided by Martin in his article in The Age.
First is the exit fee. Exit fees are fees that may be charged if you pay out your home loan in full, within a specified period, usually the first 5 years (MoneySmart, 2013). In 2010, Australian government gave ASIC the authority to regulate exit fees. In our case example, if one was to exit a loan of $300,000 payable within 25 years in the first three years, the exit fee that would be incurred is $5178. This sizeable amount of exit fee creates a high switching cost for Australians taking home loans-through which the banks and lenders can utilize to gain more market power.
. Second, is the search cost; after exiting a loan from one supplier, it would take time and energy for
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