Sunday, March 22, 2009

Ex banker's crocodile tears

The headline trumpeted it all: Mortgage break fees: are you being ripped off?

The first paragraph set the scene.


A FORMER bank executive says the complex formulas some banks use to
calculate mortgage break fees mean
customers are being charged thousands more
than they should be to change their loans
.

Uh oh. The banks are in trouble I thought.

But let's read the story a little more closely shall we.

ASB, BNZ and the National Bank look at the change in "customer" interest rates the rates you see advertised in the window of the bank when calculating their break fees, yielding costs that Bolton says are quite fair.

But Kiwibank, Westpac and ANZ, and other lenders including GE and Wizard, base their calculations on the change in the "wholesale" interest rates (the rates banks pay to borrow from elsewhere). Because wholesale rates have fallen faster than customer rates, break fees calculated this way can be far higher.

Kiwibank, ANZ and Westpac deny their formulas do anything other then recoup the costs of breaking customers' loans. Westpac said: "We do not agree that our prepayment cost formula is inappropriate or that it overstates the loss suffered by the bank when a fixed rate loan is prepaid."

Kiwibank said: "The bank is certainly not `over-collecting' as only the genuine cost of breaking this external liability is passed on to the customer." ANZ said its formula reflected the actual costs incurred when a customer broke their contract.

Bolton says a bank using a customer rate break fee formula would not have charged Garabet anything, and using a fairer estimate of the bank's true cost of breaking Garabet's loan, the charge should have been around $4800.

Bolton says in normal times either calculation would yield similar break fees, but these are not normal times so all lenders should be using the "customer" rates, as it gives a fairer result.

In one instance a Kiwibank customer was quoted $45,800 to break their
$285,000 mortgage when, by Bolton's calculations, it should have been just
$25,300 (see table). Bolton is a former Westpac and ANZ executive, so knows how
banks fund their mortgages and therefore calculate break fees. His calculations are the first public attempt to show that banks are over-charging.


Over-charging? WFT?

It's pretty simple what this story is really about. It's about the loan contract you enter into with your lender. You ask for a loan. The bank says yes. They produce a form. You sign it. If we forget for a moment about the Credit Contracts and Consumer Finance Act which defines oppressive credit contracts (bank loan contracts essentially) we have the situation here where the contract you sign is working against you.

Tough.

But what the SST and said banker want to make this story about is in the word highlighted above. It's not fair. It's got nothing to do about the banks "over-charging".

Boo hoo.

Life ain't fair Mr Bolton. Get used to it. Or when you refinance with Westpac, as I will be in a few months, amend the loan form to refer to "customer" rates rather than "wholesale" rates if that is what you want. If Westpac doesn't wear it then I'll be telling them I'll take my $250K mortgage to a bank that will come to that particular party.

Simple.


UPDATE: As Paul says in the comments, the wholesale rate is probably where it's at in the near future.

2 comments:

Adolf Fiinkensein said...

I'm a bit dubious about the accuracy of this fellow's commentary when I see he has ANZ in one camp and National in another. They are one and the same outfit.

I don't recall anyone complaining when the same banks honoured their fixed rate contracts at a time when floating rates were going sky high.

The whole thing is a beat up. Nothing but whinging crocodile tears.

PaulL said...

Given the increase recently in the gap between wholesale and customer, anyone signing a contract today with break fees should be signing based on wholesale - because it is likely that customer rates will drop in the next couple years even though wholesale rates don't move or even go up a bit.

Sure, if you were signing 2 years ago - customer rates were the go. But that particular horse has bolted, and the right action now is different.