A bank has been accused of failing to notify a business owner before transitioning their interest-only loan to principal and interest. But My Business can reveal that in certain circumstances, banks are not required to issue such a warning.
Commenting on a story about 5,000 accountants owing money to the ATO, the anonymous reader outlined how they were already in a difficult situation before being hit with an unexpected hike in their mortgage payments.
“See how easy it is to keep up when you get seriously ill (with heart problems) and, before you recover, get hit by the banks converting interest-only loans to P&I [principal and interest] without consultation and taking 35–40 per cent of your average cash flow,” the commenter said.
“The banks did not care what your commitments were; all they were interested in was paying that principal back in less than eight years. Very easy to get behind and very hard to catch up.”
The commenter did not identify which bank their loan is with.
Notice required in most, but not all, circumstances
A spokesperson for ASIC told My Business that while it would depend on the relevant loan agreement, lenders are generally required by law to provide advanced notice of increases in repayments.
But in relation to mortgages, this rule typically only applies where the loan has a variable interest rate.
“Section 65 of the National Credit Code applies where the amount of a repayment is being increased, and requires 20 days’ notice,” the spokesperson said.
“[However,] this section does not apply where an increase in repayment occurs automatically and is specified in the contract, i.e. both the amount of the increase and when the increase will occur is specified [s63(2)(b)].”
The ASIC spokesperson went on to say that the majority of interest-only loans issued by lenders in Australia are variable rate loans, meaning most borrowers are entitled to advanced warning.
“For most interest-only loans at the point where the loan rolls over to principal and interest repayments, the loan is likely to be a variable rate loan. This is likely to mean that the contract would not specify the amount of the increase, as it would be unascertainable at the time the contract was agreed (i.e. dependent on interest rate movements).
“Therefore, notice would likely be required.”
But the same is not necessarily true for fixed rate loans, which usually set out from the outset what the new interest rate and repayments will be once the loan reverts to principal and interest.
The spokesperson added that, in the case outlined by the reader, “it would be important to consider how the bank may have sought to notify the customer, and perhaps to contact the bank to confirm whether this happened and how”.
Check your contracts
A spokesperson for the Australian Financial Complaints Authority (AFCA) - which replaced the Financial Ombudsman Service - told My Business that it does not retain data on complaints specifically related to this issue, but did not that almost half of the 310 complaints it received daily in its first month of operation related to credit products.
“Anecdotally, complaints related to the rollover of interest-only loans to principal and interest-only arise because of the financial firm being unwilling to extend the interest-only period.
The spokesperson urged all borrowers to be alert to the terms of their loan agreement:
“We advise customers to protect themselves by reading contracts carefully before signing, and taking note of when the rollover of their loan from interest-only to principal and interest-only occurs.”
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.