AusFinance Gazette

Can the bank actually do that?!

From time to time the banks pull out something from the fine print and take us by surprise. There’s been a couple of recent instances which made the news, let’s dive in to make sure that you’re aware and not effected in the future.

You may not have been directly impacted by these but knowing about them serves an important lesson.

Why is this the case? Well, coronavirus’ impact may continue to force banks to react and make changes that they wouldn’t ordinarily make.

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Major banks change to minimum monthly repayments

Over a million CBA and NAB customers had their monthly repayments reduced automatically last week to the minimum repayment amount required as per the repayment schedule.

With banks dropping their rates on the back of a series of interest rate cuts, many customers have been choosing to maintain their monthly repayment pegged to a higher interest rate in order to pay off their loan sooner.

CBA notified customers of the change and put the onus on them to ‘opt-out’ if they would like to maintain their current repayments at a higher level. Ordinarily, banks operate on an ‘opt-in’ system, where any changes to repayments are implemented based on the customers’ request when interest rates fall. NAB sent out an email notifying customers of the ‘good news’ while not providing details on how to maintain the larger repayments.

This sort of sounds like positive news, maybe?

After all, CBA says The changes will save the average customer $400 a month and release up to $3.6 billion in cash for Australian households.

But as Fiona Guthrie from Financial Counselling Australia pointed out reducing your repayments means that you’re paying off your loan at a slower rate, which means that a customer is paying more interest.

“It means that you’ll end up paying more and the loan will take longer to pay off. It can be substantial, it could be tens of thousands of dollars for some people.” she says.

ME Bank-flip

ME Bank started the month of May 2020 announcing that they were taking money from some redraw accounts to pay down mortgage balances of customers.

The move caught many of these people off guard, with many publicly criticising the bank after losing access to thousands of dollars which would have been ordinarily available to them to get through difficulties if required due to the Coronavirus.

This turned into a PR disaster for ME Bank, with APRA issuing them a “please explain.”

ME Bank originally issued a statement apologising for the poor communication but stood by their decision, however the backlash from the public and regulator eventually forced them to reverse their decision and return access to the funds in redraw for the effected customers.

What’s to be learned from this?

Even though ME Bank reversed their decision, primarily due to public pressure, redraw accounts do not necessarily behave the same way as an offset account in that a lender can ‘take’ the balance and absorb it into the loan. Redraw has its benefits but it pays to understand the product and the terms and conditions that come with it.

Look after number 1

ME Bank, CBA and NAB came out publicly declaring that they were attempting to “help customers”.

That may be the case. But if you really want to help yourself, it pays to take initiative and stay on top of what’s happening rather than to rely on the banks acting in your best interest.

If you figure that the reduction in minimum repayments comes as a bit of relief for you and your family, then, by all means, take advantage of the change. However, if you were comfortably making your repayments at the higher level, you’ll need to get in touch with CBA or NAB directly to let them know your preference. You’ll likely save thousands in interest over the life of your loan by paying the higher amount.

If you’d like a hand reviewing your loan and exploring your options in light of COVID-19, please don’t hesitate to get in touch – we’re always here to help when you need us.

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