Fixed-rate housing loans would be the next foreign-currency-loans debacle, according to a spokesman for the National Australia Bank.
He was speaking after being told of a Canberra woman had been hit with an $11,000 penalty by the Advance Bank for paying out a fixed-interest mortgage 2{ years early. She must pay it before she can sell her house.
Alanna Maclean wants to sell her house in Downer. When she bought it in July 1990 she took out a fixed-interest loan at 15.95 per cent for five years. On seeking to sell and pay out the loan she was told the bank would suffer a loss of $10,896 and there would be a $100 document preparation fee. A management fee was waived.
Ms Maclean said, “”I knew I would have to pay something to get out early, but not that much. You don’t realise you are being asked to take that sort of risk when you look at the documents.”
The loan documents signed by Ms Maclean and the bank say, “”The borrower acknowledges to the bank that early termination of the loan may result in the bank incurring losses and/or expenses .The borrower acknowledges that a certificate from the bank which certifies the amount of such losses and/or expenses or profit shall be conclusive evidence of such looses and/or expenses in the absence of manifest error.”
In explaining the fee, the bank said it was calculated as follows: an interest rate is calculated on the difference between the loan rate and the going rate. This is applied to the principal over the outstanding term of the loan. In Ms Maclean’s case this was 6.797 per cent of $75,000 over 853 days. And there was a discount in favour of the customer (in this case $1000) because of the bank’s ability to get better rates because of its higher volume.
Arthur Delbridge, speaking for the bank, said the figure was the actual cost to the bank without profit or margins.
The public relations manger of the National Australia Bank, Hayden Park, said his bank had not actively promoted these sorts of loans. The bank had been in the market a long time and had seen interest rates rise and fall.
He thought fixed-rate housing loans would be the next foreign-loans debacle. (Banks were heavily criticised in the late 1980s and early 1990s over the practice of writing loans in nominally low-interest foreign-currency loans. Customers were later caught when the Australian dollar fell and they had to pay the principal back in the foreign currency, making it much more expensive.)
Mr Park said it did not make sense to take out a fixed loan for housing because these were long term, usually 20 years. In that time the rate would go up and down and it was better to have the flexibility of being able to pay out without a fee.
“”If the professionals can’t get it right, how can you and I,” he said. “”But people have to live by their decision. On the other side of the fence if you were a fixed-term depositor you would be upset if the bank suddenly cut your rate.”
People had laughed when he and others in his bank had warned of future difficulties of fixed-rate loans.
A spokesman for the Commonwealth Bank when presented with Ms Maclean’s figures said the pay-out fee would be $1994. Figures of $10,000 for that type of loan were unknown in his experience.
The office of the Banking Ombudsman said yesterday that these sorts of loans had caused quite a few complaints.
Complainants acknowledged they had to pay a fee and that the banks had incurred losses, but they were objected to the way it was calculated and the size of it.
Some banks made it clear how early-exit fees were to be calculated. Some put it at three or six months’ payments. Some had formulas.
“”But people never dream that it will be in the range of $10,000,” a spokeswoman said. “”Suddenly having to find an extra $10,000 when moving to another house can be very difficult.”
The office had negotiated resolutions successfully, not always reducing the amount, but by explaining how it was arrived at. There could be no doubt that the banks incurred losses in these cases which had to be passed on to the customer.
Every case had to be looked at individually. See cited cases of forced sale through death, divorce or job movement.
She advised Ms Maclean to see if she could resolve her dispute with the bank and if not then to ring the Banking Ombudsman on 008 337444.
Mr Delbridge said the customer would have been advised by a solicitor. Because she did not understand the contract now she wanted to get out of it.
“”I think that is an extraordinary view,” he said. “”I appreciate how she feels, but that’s the agreement she had entered into.”
It was a commonplace contract.
The bank was following the recommendations of the Martin Committee which had said the customer who had caused the loss should be charged for it.
Mr Delbridge said he sympathised with people caught by the sudden drop in interest rates and he would be happy to sit down with Ms Maclean to show her exactly how the figure had been worked out.
“”If you ran that by any bank they would come out with a similar figure,” he said. Several cases from the Advance had gone to the Banking Ombudsman who had found that the bank had behaved properly.
Ms Maclean said the mortgage document was a lot of unreadable legal mumbo jumbo. She had relied on the letter of offer. It said there would be a fee for early repayment to be set by the bank. She thought that, the Advance bank being a reasonable bank, would charge say, one or two thousand dollars and that if it were more the bank would have specifically pointed that out in the letter of offer.
“”It is now a case of the individual vs the bank,” she said.
It would cost more in legal fees to test than the case was worth, so the banks win against individuals.
Both NAB and ANZ letters of offer described how early repayment fees were calculated.
All banks give a rebate if interest rates go up and the customer wants to get out early.
Steve Marcus of ANZ said in these cases the bank bought the funds at a certain rate to support the fixed-rate loans. If they were paid out early and interest rates fell, the bank suffered a loss. He was not surprised at the Advance Bank figure in Ms Maclean’s case.