Puzzle Finance Blog

Don't bank on lenders getting it right

Overcharging can leave borrowers out of pocket.

Paying more than you legally owe on a home loan sounds like the stuff of financial nightmares. Yet some borrowers are being overcharged thousands of dollars because of errors made by banks.

Overcharging commonly occurs when mistakes are made by a lender in setting up an offset account linked to a home loan.

Great care also needs to be taken when restructuring loan finance, both on your own home and with investment property. It's vital to ensure any interest-rate discount that's meant to be part of a new loan actually materialises.

The non-delivery of negotiated discounts - such as those offered on premium and professional home-loan packages - is a big problem area, according to mortgage brokers.

Only the reckless fail to scrutinise their mortgage statements. You can't rely on your lender to discover any mistakes. If you don't check the lender's interest calculations and query any figures that seem wrong, it's quite possible you'll go on paying more than you are legally obliged to for decades.

An offset account is a transaction account with the same financial institution with which you have a home loan. You deposit your income into the account and the daily balance is offset against the amount owing on your home loan.

You only pay interest on the outstanding balance. For example, if you have a loan of $180,000 and a balance of $10,000 in your offset account, you will pay interest on $170,000. It's a way to minimise your taxable income, pay off your mortgage early and still have access to your funds.

But bank staff can make mistakes in crediting offset earnings to a home loan. Although banks say such mistakes are unusual, Mortgage Watchdog, which sells mortgage-checking software, estimates home-loan borrowers are overcharged up to $300 million a year. It also says 80 per cent of errors favour banks.

The senior corporate affairs manager of broker group Mortgage Choice, Kristy Sheppard, says most errors occur at the start of a loan.

She says there are no fines or disincentives for banks that overcharge, so consumers have to take the initiative.

"Borrowers need to make sure they keep an eye on their lender and on the way the lender charges interest," she says. "You should check that the correct repayments are being taken out and that the offset account is having what looks to be the right effect on the loan."

Overcharging seems to be becoming more widespread due to the new complexity of the home-loan market. Competition in banking has given Australians a huge choice of loan products.

You can select from a range of basic variable-rate loans that are far more flexible than they were in the 1990s and which are now packaged with ongoing rate discounts, plus offset and redraw facilities. Then there is a plethora of fixed-rate, split-rate, interest-only and line-of-credit loan deals.

The trend to "tailored" loans, which often involve setting up linked accounts, means there is great potential for error. Someone at the bank has to physically link an offset account to a home loan, which perhaps explains why offset accounts have the highest incidence of reported errors.

Line-of-credit loans are another key source of errors because of the high level of transaction activity associated with these loans.

This month has been designated "Mortgage Health Month" by the Australian Securities and Investments Commission. ASIC is encouraging people to use its MoneySmart website, which offers advice on dealing with financial stress, as well as a mortgage switching calculator.

It pays to remember that keeping a loan in good shape is not only about being able to pay it off. You also have to keep an eye on your lender and be ready to ask for an "interest reconstruction" if you suspect something has gone awry.

Posted by Chris Tolhurst - Domain (The Age) on 24th September, 2011 | Comments | Trackbacks

Bookmark and Share

The trackback URL for this page is http://www.puzzlefinance.com.au/trackback?post=24887017


There are no trackbacks for this post


There are no comments for this post

Post a Comment

HTML is not allowed in comments, http://... will be automatically linked.

Name (required):

Email Address (not displayed):

Comment (required):

To help prevent spam, please enter the word chef here:

Puzzle Finance Blog

About Puzzle Finance


September 2017
August 2017
July 2017
June 2017
May 2017
March 2017
February 2017
January 2017
December 2016
November 2016
October 2016
July 2016
June 2016
May 2016
April 2016
March 2016
February 2016
January 2016
December 2015
November 2015
October 2015
September 2015
August 2015
July 2015
June 2015
May 2015
April 2015
March 2015
February 2015
January 2015
December 2014
November 2014
October 2014
September 2014
August 2014
July 2014
June 2014
May 2014
April 2014
March 2014
February 2014
January 2014
December 2013
November 2013
October 2013
September 2013
August 2013
July 2013
June 2013
May 2013
April 2013
March 2013
February 2013
January 2013
December 2012
November 2012
October 2012
September 2012
August 2012
July 2012
June 2012
May 2012
April 2012
March 2012
February 2012
January 2012
December 2011
November 2011
October 2011
September 2011
August 2011
July 2011
June 2011
May 2011
April 2011
March 2011
February 2011
January 2011
December 2010
November 2010
October 2010
September 2010


Purchase or Rent (1)
The Age (1)