The Australian Competition and Consumer Commission released its interim findings from a sweeping review of mortgage interest rate decisions by the big banks on Thursday.

The report examined pricing behaviour of ANZ, Commonwealth, Macquarie, National Australia Bank and Westpac.

Its release coincides with heightened public scrutiny on the industry as the first hearings for the banking royal commission began this week.

Analysts had predicted the report could further dampen the banks' "pricing power" in the $1.6 trillion mortgage market, which is a crucial driver of the industry's profits.

The ACCC said internal bank documents revealed "less-than-vigorous" price competition and signs of "oligopoly behaviour" among the big four banks in particular.

"The pricing behaviour of each of the inquiry banks appears more consistent with ‘accommodating’ a shared interest in avoiding the disruption of mutually beneficial pricing outcomes, rather than consistently vying for market share by offering the lowest interest rates," the report said.

It said the big four banks largely looked to each other to determine headline interest rates and
discounts on variable rate residential mortgages.

"The inquiry banks generally have not sought to compete by consistently offering the lowest headline variable interest rates to borrowers."

The report criticised a lack of transparency among the banks, saying some of their discounts on residential mortgage rates were set against criteria, some of which were "opaque to the borrower".

The criteria included the customer's risk profile, ability to negotiate, geographic location, the borrower's value to the bank and the bank's desire to write new business.

ACCC chairman Rod Sims said lack of transparency made it "almost impossible" for customers to get accurate interest rate comparisons without "a great deal of time and effort".

“But the potential savings from these discounts are immense,” he said.

Borrowers had increasingly turned to mortgage brokers to give them a better view of the options available across a range of lenders.

The report found the average interest rates paid for basic or "no frills" loans were often higher than for standard loans at the same bank.

“We think many customers who opted for ‘basic’ or ‘no frills’ loans thinking they are saving money would be surprised to learn they might actually be paying more," Mr Sims said.

He said the report's findings suggested many customers were not rewarded for their loyalty and would benefit from switching lenders, or approaching their bank for a better rate.

The report  said some big banks were looking at strategies to recover the cost of the major banks' levy, which came into effect last July.

However, the big banks said in November they hadn't decided to adjust residential mortgage prices in response to the tax.

"The inquiry banks have all decided to treat the cost of the major bank levy as an interest expense in their financial statements," the report said.

The watchdog's final report will be released in June.

National Australia Bank chief operating officer said Antony Cahill said the bank had to balance numerous factors to set home loan rates and lending policies.Those "complex" decisions were "not made lightly", he said."This includes taking into consideration the needs of customers, regulatory constraints, the competitive landscape, the economic environment, the cost of doing business, the home lending portfolio performance and composition, and the overall performance of NAB as a company."

He said the bank monitored competitors "both large and small" to make sure it provided competitive home loans.

Mr Cahill said NAB considered a customer's individual circumstances including the loan amount, repayment method, ability to repay and what other lenders may offer when determining discounts.

He said the bank would review the findings and work with the ACCC as it prepared the final report.

A Commonwealth Bank spokeswoman said the bank would review the report and consider the ACCC’s findings.

ANZ and Westpac were also approached for comment.