Tuesday, November 9, 2010

Whatever They Want, Whenever They Want

For years I have known that Australian bank mortgage contracts are not really contracts at all. They are more like documents of indentured servitude. If you bother to read the small print, as I did once many moons ago, you will discover that there is usually a clause which says something like “the bank may vary any of the terms and conditions at its discretion at any time without notice.” It effectively means that while you have signed up to a set of conditions which will bind you, committing you to pay on time, to pay certain fees under certain circumstances, and so on, there is no such constraint on the bank. The so called contract does not commit the bank to anything, because that wonderful escape clause basically means that you have agreed to let them get away with doing whatever they want, whenever they want, without consultation or recourse.

When it comes to the standard variable rate home loan, we are usually fully aware that the bank reserves the right to change the interest rate as it sees fit. Even though we might not like it, we know that’s what we have signed up for. However, even that arrangement is now being called into question with the revelation that Australian home loans are almost unique in the world. It turns out that in some countries, most notably the United States of America, the “standard” home loan is usually a fixed rate long term loan. Not only that, but it is also usually a non-recourse loan, meaning that if the worst occurs and the bank is forced to take your house away you are at least protected from owing the bank any shortfall that might occur if the house is worth less than the debt.

Although the American approach sounds more appealing than ours, it is also unusual. In fact, the most prevalent form of home loan around the world is known as the “adjustable rate” loan. In this version of a variable rate loan the contract binds not only the customer but also the bank to an interest rate which is determined by adding a specific margin to a benchmark interest rate. For example, in Britain a typical home loan interest rate might be set at the Bank Of England Base Rate plus 2.25%. If a similar scheme existed here it would have prevented the Commonwealth Bank from making its controversial decision to almost double the Reserve Bank increase, saving their customers a whole lot of anguish, and the bank a savage public relations backlash.

With so much discussion in the past week about reform of banking regulations, and improving competition among banks, there is now a proposal to introduce this form of lending here in Australia. Along with restrictions on excessive fees and charges, this is a measure which would help to give Australian bank customers a better deal. So why has Australia been the odd one out for so long? Why have these “adjustable rate” loans not been offered to Australian customers before? The answer can only be that, until now, the big banks have been able to get away with doing whatever they please, whenever they please.

It even says so, right there in the fine print of their loan contracts.

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