Caught By Penalties In Fixed-interest Loan
Sydney Morning Herald
Wednesday January 15, 1992
With most variable housing interest rates at 11 per cent a year, more and more borrowers who took out fixed-rate loans two years ago at 15.25 to 15.5 per cent are finding their hopes for lower repayments dashed when they look at the refinancing option.
Many borrowers who took out five and 10-year loans two years ago at the higher rates and who, at the time, thought if interest rates did drop they could refinance their loan at a cost of (at most) three months' interest, have received a rude shock.
One such borrower, Mrs Renee Goossens, took out a $170,000 housing loan for a 10-year period in August 1990, with a fixed-interest rate of 15.25 per cent a year from the Chase AMP bank. At the time, market interest rates on variable interest loans were hovering about 17.25 to 17.5 per cent a year.
The loan, taken out with the Chase AMP bank, involved monthly repayments of$2,200.
As the home loan interest rate dropped, and Chase AMP Bank was taken over by Westpac, and because she needed a further $10,000 to carry out some essential renovations, Mrs Goossens decided to pay out the Chase AMP loan and to take out another one at a lower interest rate.
She was particularly attracted to a 9.75 per cent variable interest loan marketed by GIO Australia.
But when she asked Westpac about the payout figure, she was alarmed to find that she would have to pay $52,073 in penalty interest charges for repaying the loan eight and a half years early.
She was referred to a clause in her loan agreement which said: "If you repay the loan prior to the end of the term, you will pay the bank an additional fee on the date of such repayment."
This fee is an estimation of the loss that would be incurred by the bank and would be only payable when the bank's reinvestment rate was less than the interest rate.
"The additional fee shall be the sum of the amounts calculated in accordance with the following formula for each year from the time of early repayment until the end of the term of the loan."
A fairly complicated formula follows and the result is the early discharge penalty payment of $52,073.
As it was in black and white in the contract, Mrs Goossens has little option but to stick with her loan costing $2,200 a month, rather than the$1,400 a month she would be paying if she renegotiated a loan at the 9.75 per annum rate.
In addition, the bank said she owed $3,958 in accrued interest, although there was no explanation as to how this amount came about.
"We have now discovered we could refinance at 9.75 variable with GIO, 10.5 per cent with a building society and between 11 per cent and 12.5 per cent with various banks," Mrs Goossens said. "But we would have to pay out $52,000 to do so."
As she pointed out, it would take 86 months or just over seven years at the lower interest rate to pay off the penalty payable if she refinanced.
Mrs Goossens, like a lot of other borrowers caught in a similar bind, must now hope that in the next eight and a half years interest rates will climb again to more than 15.25 per cent.
THE RATES
WHAT YOU GET %
Savings/Cheque Accounts
For $1,000 deposit:
Banks 3.75-5
Building societies 3.75-5
Credit unions 3.5-5
For $5,000 deposit:
Banks 5-5.75
Building societies 3.95-6
Credit unions 4.5-6
Other deposit rates
3-yr fin co debs 9-9.2
Cash mgt trusts 6.78-7.50
Common funds 6.96-7.78
Five-year govt sec 8.61-8.75
WHAT YOU PAY %
Home loan (variable)
Banks 11
Building soc 11
Credit unions 12-13
Home loan (fixed)
Banks 11.90-14
Building soc 13.0-13.5
Credit unions n. appl.
Personal loans
Banks 15-19.5
Building soc 16-19
Credit unions 15-19
Credit cards
Banks 19-24.8
Building soc 19-19.5
Credit unions 18-19
© 1992 Sydney Morning Herald