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.