By Effie Zahos,
, August 2009
When Money reader Phil took out a home loan with ING Direct back in 2006, the contract he signed was very different to the contract that’s been handed to him now.
“Our original contract stated that we had a redraw facility attached to our home loan,” says Phil. “The other day we received a letter from our bank simply stating that this condition is changing. The bank was now able to suspend, reduce or cancel the redraw facility at any time and for any reason.”
You can understand why this makes Phil nervous – with over $40,000 sitting in his redraw facility he’s worried that on any given day his bank can wipe away access to this cash. “Is this legal?” says Phil. “Can they make such a significant change, considering that we have so much money available to us in the redraw facility.”
Karen Cox, from the NSW Consumer Credit Legal Centre says, yes. “Many homeowners would be surprised to learn that they’ve probably already agreed to their lender being able to unilaterally vary the conditions of their loan,” she says.
While the Consumer Credit Legal Centre believes lenders need some flexibility, unilateral clauses that allow lenders to completely change a condition are unfair.
In these economic times however it comes as no surprise they are targeting this particular feature.
Redraw allows homeowners to stash any extra cash in their loan, thereby reducing the interest they pay, and at the same time giving them access to the extra funds whenever, and for whatever, they like. In Phil’s case that extra $40,000 was only ever a temporary deposit into their loan. “Now I know they can potentially reduce or cancel the redraw facility, having my mortgage with them is a risk I can’t take,” he says.
So what are his options? As I reported back in my June 2009 banking column, Caught by a rule, most mortgage contracts do give lenders the right to cancel features such as redraw. Generally they would do this only if you are in arrears, but conditions surrounding redraws do differ between lenders.
For instance, ANZ can refuse to provide further redraws if you are in default. NAB has taken it upon itself to take one month’s repayment out of all redraw facilities in a bid to protect its homeowners from “inadvertently causing their account to become past due”.
Phil’s initial home contract did stipulate that if he was in arrears or financial circumstances changed, the lender had the right to refuse to re-lend under the redraw facility. That’s very different to the new clause that allows them to “suspend, reduce or cancel the redraw facility at any time”.
For some homeowners the answer may be to swap their redraw facility for a mortgage offset. An offset works in the same manner as a redraw, but it operates as a separate deposit account that has full transactional capability.
Unfortunately for Phil this isn’t an option: “My lender doesn’t offer mortgage offset, plus I’ve split my loan into a fixed and variable portion so I’d have to pay an exit fee if I want to refinance to another lender.”
Money is still waiting for ING Direct to get back to us with the details of the circumstances in which they would cancel the redraw facility – we’ll keep you posted.
Phil might take comfort from new laws set to come in as early as January next year. Cox says: “It may give consumers the opportunity to challenge contract terms found to be unfair as defined by the act and likely to cause detriment.”
While the law would more than probably act prospectively rather than retrospectively, any contracts or accounts renewed or varied from the date the law is passed would fall under the provision.
More details should be known by September this year. In the meantime Money urges all consumers to get familiar with the fine print of their home loan.
Money Magazine's August 2009 issue is out now. Subscribe now.
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