The dangers of the redraw facility
So, who else got caught out by ME Bank’s “amortisation error correction” late last month?
No doubt many of you saw the recent media articles about an unannounced adjustment that ME Bank made to approximately 20,000 of their home loan customers’ loan accounts, where money that had been available for redraw all of a sudden wasn’t available any more. I am one of those customers.
(Refer articles in the Sydney Morning Herald, The Age. Note also that these articles are a tad on the scandal-mongering side, and are both by the same author (one with a co-author). More balanced reporting can be found on the ABC site and The Guardian.)
I want to state up front that it appears that ME Bank has not acted illegally, nor has it acted in breach of it’s product’s terms and conditions – the T&Cs state that they can make changes to your loan without having to inform you first where those changes reduce your obligations [to them]. This is the case here; as the adjustment has reduced the amount owing (the obligation) on these customers’ loans, ME were under no obligation to advise people first.
However, it does seem that something has changed over time, as information that has since been posted on their website indicates that the adjustment has only been made to customers with “legacy home loan products” that were taken out over five years ago, and the apology that has been posted on May 5th by their CEO states that “[i]t does not affect any loans originated over the past 5 years which operate with a different redraw feature” (bolding is mine). Also, strangely, a search today of their website for ‘terms and conditions’ did NOT return a listing for the T&Cs for any of their home loan products. Removing access to this information seems unwise, given the customer reaction.
The devil is in the details
The important thing to understand about a redraw facility is that, because the additional funds that you’ve paid in over time are sitting on the loan itself rather than in a separate account (whether that’s an offset account or any other type of account), banks regard those funds as additional payments to the loan. While they are prepared to allow you to access those funds, they’re only prepared to allow you access to those funds that are in excess of your repayment schedule; i.e. they look at how much you would have had owing had you not paid in any extra and then calculate from there how much you have available to redraw.
Alternatively, if your funds are in an offset account, they are not regarded as additional payments – all that happens is that the amount you have in the offset is subtracted from the amount owing on your loan in order to calculate the interest you’ll be charged. The drawback to an offset facility, though, is that most banks will charge you for the privilege. These days offset accounts generally form part of a “loan package” that provides more flexibility than a basic, bog-standard loan, and they’ll usually cost you in the vicinity of $400 a year in fees. Therefore many of us, myself included, use the redraw facility in lieu of offset because it’s usually free.
For many people, if they have a home loan on their principal place of residence (PPOR), parking their emergency funds (Mojo) and any other significant savings on that loan is a good way to reduce the interest on their loan, especially if they’re aiming to pay the loan off as soon as possible. In the current economic climate, with interest rates the lowest seen in pretty much forever, those of us who are keen to get the banker off our back (as the Barefoot Investor says) see this as a useful avenue to achieve that goal – what we save in loan interest will usually exceed anything we might earn, even in a high-interest savings account. Naturally this depends on the individual’s situation, though, with regard to how long they have to go to retirement or just to reaching FI – many will prefer to invest instead as the return there is usually significantly higher.
This event is a powerful lesson in why you need to understand the conditions of your loan, and think carefully about where you put money that you might need to access in the future.
Communication is key!
Returning to the issue of ME Bank’s actions, I get that perhaps the effort involved in contacting 20,000 customers might be perceived as being too labour-intensive (although surely a form letter couldn’t be that hard – heck, even a message via the online banking message system?) or too costly in postage, but wouldn’t you think that upsetting 20,000-odd customers who might then decide to refinance elsewhere and take all their non-loan accounts with them might be even more costly? Even the FAQ that has since been posted to ME’s website does not actually answer the question of why people were not informed beforehand that there was an issue that needed to be addressed. The question is there but the posted response doesn’t actually answer it, it just reiterates why they took this action rather than explaining why they opted not to inform customers first.
Compared to many of those 20,000 customers, I’m very lucky – the amount that was absorbed was quite small, and I was intending to clear some funds against the loan in the next couple of months anyway; this has just brought that forward a little. Some people have had tens of thousands of dollars absorbed, and for some people that was money that they needed to live on. For example, one person (out of the 1900!) who responded to ME’s apology post on Facebook said that money that they had on their loan was her husband’s redundancy payout.
Given the current issues related to the COVID-19 pandemic – people having their hours reduced or losing their jobs altogether – ME Bank’s decision to proceed without any prior communication was decidedly ill-advised. While the bad press this has generated will last about five minutes (the 24-hour media cycle being what it is), this is the kind of stuff that destroys customer trust.
Hopefully other banks will take note of the salutary lesson here – just because you can, it doesn’t mean you should.