Banks are talking the customer-care talk in these testing times – but aren’t walking the walk.
And I don’t just mean ME Bank, which last week did a cynical sweep of money its customers held in mortgage redraw facilities.
Shocked and heart-broken borrowers have approached me in despair about the apparent disappearance of up to $39,000 of their savings.
Also read: Anger after bank's shifty home loan move
But what’s been largely missed is that ME bank is not the first lender to do such a thing.
And it won’t be the last… which should send chills up the spines of any mortgage holder with extra money in their mortgage.
CBA pioneered the ‘take’ tactic nearly two years ago, which I exposed, when it conducted a sweep of redraw accounts with the purported aim of ensuring home loans would be paid out on time.
With such a ‘sweep’, if you have somehow fallen behind in your loan schedule, your extra money could essentially evaporate overnight.
Lenders won’t admit it, but that means along the way somewhere they’ve made a mistake in calculating your minimum monthly repayment.
ME Bank came closest to a confession, stating: “ME identified the redraw facility of some legacy home loans could lead to some customers falling behind their original repayment schedules.”
“We are reviewing the personal circumstances of each customer affected and are committed to working with them to determine how we can help customers with their individual financial needs.”
In any case, borrowers are the ones to suffer, losing money they might not have intended for the mortgage at all.
The money could instead have been ‘parked’ there simply to save interest, but have been meant as their:
‘Holy sh*t’ fund of preferably six months’ salary
Savings for the next car, couch, holiday (eg ME Bank customers told me they had money set aside for caravans and home renovations)
Deposit for their next home
I sound a big warning in my new book about the flaws of this all-in-one-pot strategy – I also detail the far smarter way, which I’ll get to in a mo.
As such, I wrote a coronavirus financial survival guide for Yahoo Finance, just five weeks ago, that said: “If you have a mortgage, see if you can redraw any additional payments now”.
“Though lenders are being the most understanding and lenient I have ever seen them, you just never know when some fine-print nasty might lock away this extra, emergency money.”
There’s no satisfaction in being right. I’m horrified so many people have been so quickly and traumatically caught out.
But they’ve been caught out by ME Bank’s latest overt raid on redraw. Right now, there are covert attacks by multiple institutions on thousands of home-loan holders too…
Multiple lenders conducting ‘sneak sweep’ on redraw money
There are two methods lenders can use to execute a ‘sneak sweep’ of borrowers’ redraw savings.
Firstly, people who have money sitting in redraw and who ask for repayment holidays are being cast aside.
Many lenders are refusing such holidays when you are ahead on your loan. They far prefer you to run out your own money than strain their own bottom line.
Bye bye buffer.
Then there are lenders that are approving repayment holidays in these circumstances, but are subsequently, happily sucking up all your redraw money as the minimum monthly repayment each month… before that holiday actually starts.
That’s not a holiday at all!
The worst incarnation of this is when they don’t even tell you that your savings are going to be savaged. You must ask.
Which brings me to the second – similar in that savings also erode month-after-month – vanishing trick. This is another ‘sweep’ of redraw, this time involving the downwards adjustment of your minimum monthly repayments… because hey, you’re ahead!
It’s a ploy CBA has just pulled with every customer… and anyone who wants to maintain payments at a higher level must request to do so.
CBA says it’s about generously boosting day-to-day cashflow: “You’ll have access to extra money should you need it.”
But it means both that any overpayments sitting in a home loan will, again, be exhausted over time... and yup, you’ll pay far higher interest over the full loan term.
Four ways to protect the overpayments you’ve made
Here’s what to do to safeguard the extra money in your mortgage, in four different circumstances:
1. As I warned on Yahoo Finance roughly a month ago, if you’re relying on overpayments for ‘holy sh*t’ moments, get your extra money out by redraw first... and get it into an offset account.
2. As I also warned in that column, if you are going to ask for a mortgage holiday, get your extra money out by redraw first... and get it into an offset account.
3. As I warned in an exclusive video for Yahoo Finance late last year, if you want to SAFELY use every dollar twice, get your extra money out by redraw... and into an offset account.
4. And as I detailed in a second exclusive video for Yahoo Finance, if there’s any chance you’ll want in future to live somewhere else, you MUST put any extra repayments and lump sums not directly into your loan, but into an offset account.
An offset is simply a parallel but, importantly, quarantined savings account that gives you an identical interest rate saving to paying extra directly into your mortgage… but without the redraw risk.
Get one if you want to repay your mortgage years earlier. And if you want to keep your lender’s mitts off your money.