A couple’s regret over their choice to secure a five-year fixed home loan in 2023 has led them to an unsuccessful complaint against their banking institution. This situation has recently come to light following a case note released by the Banking Ombudsman.
Initially, the couple had opted for a one-year fixed loan in both 2021 and 2022. However, in 2023, they decided to lock in a five-year term at the lowest available interest rate at that time. According to data from the Reserve Bank, during 2023, the average special rate for a five-year fixed mortgage fluctuated between 6.29% and 6.66%.
Seeking to break their fixed term this year, the couple reached out to their bank, which is currently advertising enticing rates of just 4.49% for one-year loans.
The couple alleged that they were misled and pressured by the bank into fixing their loan for an extended period of five years. The woman specifically claimed that she relied heavily on the guidance provided by bank staff. In light of this, she requested that the bank waive the hefty estimated break fee, which ranged from $45,000 to $50,000.
Upon reviewing the case, the ombudsman highlighted that the correspondence between the couple and the bank did not support their claims of being pressured. It noted, "There was no evidence that bank staff coerced [her] when they refixed in 2021 and 2022. In 2021, [she] chose the lowest available one-year fixed rate after declining offered hardship assistance. Again, in 2022, the couple selected a one-year term at the best rate available."
In 2023, the woman had requested a review session of her home loan with a senior business manager. She recalled the manager mentioning that interest rates were likely to increase, which influenced her decision to fix for five years. However, there was no record of the conversation, and while the manager shared standard disclosures, the follow-up email merely summarized the options discussed without suggesting a five-year fix.
The ombudsman emphasized that the woman had inquired about the five-year rate and accepted it, also agreeing to a $3,000 loyalty payment that required her to remain with the bank for a minimum of three years. "[She] was provided with ample time, options, and clear written information prior to making her decision. We found no evidence of any pressure or misleading conduct from the bank," stated the ombudsman.
Additionally, the review examined whether the bank adequately disclosed the early repayment fees. The original loan agreement, along with subsequent variation letters, clearly outlined how these charges were calculated and cautioned that such fees could be substantial. The bank, therefore, fulfilled its obligations as mandated by the Credit Contracts and Consumer Finance Act 2003.
Consequently, the couple's complaint was not upheld, leaving them to face the financial consequences alone.
Jeremy Andrews, a mortgage adviser from Key Mortgages, indicated that cases like this are not common. He recounted a recent instance where a client had fixed his loan for five years at a rate of 6.39%. This client did not receive specific advice regarding the potential for decreasing rates over the next several years, nor was he informed about the significant early repayment penalties associated with breaking the fixed term.
The client was shocked to learn about the extent of the break fees, which amounted to well over five figures even for a smaller mortgage with more than three years left. After calculating the break costs using a specialized calculator, it appeared beneficial for him to pay the break fee to capitalize on lower rates available at a similar remaining term.
Andrews stressed that part of a mortgage adviser’s role is to understand clients' goals and help structure their loans to meet those objectives. He mentioned that discussions about the risks and costs of break fees are essential to ensure clients fully comprehend the implications before committing to long-term fixed rates.
Interestingly, longer-term fixed rates are beginning to regain popularity among borrowers, signaling a shift in market trends.
