Anthony Klan | The Australian | September 19, 2012
A study by the corporate regulator has uncovered wide-spread problems in how lenders charge mortgage “break-fees”, suggesting many borrowers are being overcharged when they refinance.
According to the Australian Securities & Investments Commission, three-quarters of the 20 lenders it surveyed failed to hold records of how they calculated how much borrowers should be charged for exiting a mortgage.
Lenders typically charge “break-fees” to cover for losses when borrowers extinguish mortgages “early”, usually defined as within the first three to five years of a loan.
The rationale is that lenders incur expenses – predominantly loan establishment costs when setting up loans – which they recoup as part of the interest repaid, but when a loan is cut short they are left out of pocket.
The charging of such fees took hold in the early 2000s after Aussie Home Loans entered the market offering low-to-no fees on the creation of new loans.
And other lenders soon offered the same.
Lenders then introduced the fee ostensibly to recoup those loan creation expenses if loans were extinguished early.
However, ASIC’s study suggests many lenders have a loose approach to how they calculate and apportion these costs, indicating many borrowers may be being overcharged.
This is supported by the fact that although fewer than 1 per cent of borrowers complained about break fees they had been charged, of those complainants about half had those fees reduced or waived completely.
Concerned borrowers were required to first make a complaint to their lender.
If they were not satisfied they were required to take complaints to the Financial Ombudsman Service or the Consumer Ombudsman Service, both of which are funded by the lending industry, but which are loosely overseen by ASIC.
According to the report none of the 20 lenders surveyed calculated the losses they incurred from early mortgage cancellations, instead only estimating losses on a “portfolio basis”.
According to the report, three-quarters of the lenders calculated loan termination fees as a proportion of the size of the loan outstanding, which could in some cases be seen as unconscionable because most early termination costs for lenders were fixed and not dependent on the size of the loan.