When you take out a home loan - or any loan - the bank lends you the money in return for you agreeing to repay it.
In addition, you need to agree to pay interest on that money, and to pay the fees they charge.
But more than that, you need to sign the documents they present, prepared by them. And you have little or no chance of changing the terms and conditions in those documents.
This is a direct reflection of the mismatch in power between you as the borrower and the bank as the lender. The bank sets all the terms. Your only choices are to shop around for a better deal. But most shopping around involves just getting a better deal on the interest rate.
However what the bank requires of you is much more than that.
Here is an incomplete summary of how rights, obligations, and responsibilities fall in the terms and conditions from the largest New Zealand bank, ANZ.
| How some key core home loan conditions apply | ||
| Can changes be made by … ? | The Bank | You |
| … for | ||
| Fixed interest rate | No | No |
| - at end of fixed rate period | reverts to floating rate | or negotiate a new fixed rate |
| or break and pay to end contract | ||
| Floating interest rate | Yes, even without your consent | No |
| or break and pay to end contract | ||
| Assign or transfer loan responsibilities/obligations | Yes, even without your consent | No, unless bank agrees |
| Require more security | Yes, even without your consent | n.a. |
| Hold the security | until repaid what you owe or might owe | n.a. |
| Change the terms and conditions | Yes, even without your consent | No |
| - including changing the term of the loan | Yes, even without your consent | yes, but only with bank's agreement |
| - Revolving credit termination | Anytime, even without your consent | No |
| and don't have to give a reason | or break and pay to end contract | |
| - Revolving credit limit decrease | Anytime, even without your consent | Yes |
| and don't have to give a reason | ||
| Charge fees, or change fee rates | Yes, even without your consent | No |
| Recover costs from other caused by changes | Yes | No |
All subject to the Code of Banking Practice and any relevant legislation like the Credit Contracts and Consumer Finance Act 2003. And the bank must act "fairly and reasonably" in its dealings and following industry guidelines and the law, even if they don't have to give you a reason for their actions.
The ANZ documents are here:
Loan summary
Standard home loan terms and conditions
Revolving credit terms and conditions
You do have one choice however; don't sign their canned agreement. But all that does in emphasise the mismatch in power between the lender and borrower. Obviously you should read and understand all documents you sign. But it is also true that you probably can't do anything about any term or condition you object to. "Reading and understanding" is probably of little help or point, other than to fully accept the submissive position you are in. After all, everyone does it because you have no practical choice - and making these legal documents easier to read and understand actually affects nothing.
We have used the ANZ documents in this story as an example. ANZ is New Zealand's largest bank with the most customers and sets the benchmark for banking relationships with clients. Similar arrangements apply with any other bank.
38 Comments
Maybe we can get that one in after prices correct (however that happens).
Although, in the unintended consequences camp.. it would certainly encourage the demand side of property speculation.. "So if i take out a mortgage, and the property value goes up, I keep the highly leveraged profit.. but if the market tanks I just send the keys back and walk away?". Add in a bit of fraud (ie dodgy valuations and borrowed deposits) and it could backfire rather severely.
As it did in the US - and yes, in the Southwest in particular.
Good point - would the AUS / NZ banks be that stupid - up until now I would have said no.
But having seen Westpac's carry on – now I simply don't know – I could only hope that more reasoned heads would prevail.
Interest rates could actually be ...lower! The Banks would compete for the better quality customers - that's how they make their money; lending - and to attract them, lower rates is the way to go.
Why do we think The Banks are lowering their rates now for 'new customers'? To improve the quality of their books. The 'bad stuff' will get left behind and any bank that is in that position could be the one to have to raise rates?
I once had some dealings with a Japanese businessman who had got himself in a bit of strife because his wife had found out that the 18 bedroom house he'd bought in the UK wasn't for her exclusive entertainment but was being shared by another female visitor that he liked to spend time with.
Mr X, we'll call him had bought this wonderful house for just over £10,000,000 in 2005 and had spent a cool £3,000,000 on doing it up a bit and getting the 18 acres of grounds manicured. Then in 2007 his wife busted him. In 2008 the house was on the market for £12,500,000. Not a whisper from the market. Price came down to £10,000,000 and in mid 2008 an offer of £8.5 million was turned down by Mr X. There was a bit of a mortgage on this place and my involvement began at the end of 2008. Anyway long and short of it is that in early 2010 with Mr X having lost control of the right to sell himself was relieved of the burden, the banks accepting a bid of £4.5 million (against their £5.25 million mortgage) to get shot of the whole thing. The moral of the story is that Mr X shouldn't have borrowed so much and probably shouldn't have got caught cheating on his wife.
There could be the very rare occasion where the bank is rushing to the waste paper basket....
https://www.nasdaq.com/article/updated-russian-man-turns-tables-on-bank…
It has never been a balanced arrangement. While the perspectve of this article is from the perspective of the borrower, try flipping the table. If you said to the bank that as a depositor here were your terms and conditions, and you laid out the same that they put into their mortgages, what do you think their response would be?
They will only loan to you if you provide them with security, but they will take your money, and be highly indignant if you demanded security. Definitely not balanced.
Interesting table. Dont forget though there's all sorts of regs under responsible lending and credit contracts act that may make some bank terms unenforcable.
Question - what do you mean by "or break and pay to end contract" at the end of fixed terms or for floating loan. There's usually no cost to end contract (outside of refinance costs) ...
I have been through this exercise recently and the futility of it doesn't surprise me!
(Me to the Commerce Commission) "I have been referred to your office by the Banking Ombudsman, as detailed in an email from them to me dated 31st May 2018, part of which reads:
“I note your comment that you believe the variation clause represents an unfair contract term. Unfair contracts are not a matter which is dealt with by our office. This issue falls under the jurisdiction of the Commerce Commission which oversees and enforces the Fair Trading Act 1986. You may wish to contact the Commerce Commission if you want to move forward on that particular point. "
(Commerce Commission to me) "We have now completed our assessment of the concerns you have raised and are writing to advise you that we will not be taking any action against (local bank) at this time.
We receive thousands of reports each year and though your report is important to us we cannot take action on every report. Each report we receive is assessed and an appropriate course of action recommended."
The Clause in the loan documentation that triggered my curiosity was:
"Changes to facility: Point 3.3 .The Bank may also amend the terms of this Agreement or Letter of Advice without having to obtain your further agreement. We will send you a confirmation of any changes at least 14 days before the relevant changes take effect"
My view is that I believe that such a clause is prejudicial to one party to the contract over the other; brings the certainty of the contract into question and that this should require that The Clause (and similar clauses) be struck out of the contract as a result.
Hence the reason for David's article. I believe similar complaints transpired across The Ditch, and in 2016 (?) their Banks ( our banks?) were required to remove Unfair Contract Terms from their documentation. My understanding is that they haven't done so here. That could level the playing field somewhat.
(PS: And you're right. Even if a borrower is in complete compliance with their loan documentation; is up to date on their payments etc, the loan can still be called in at the whim of the Bank. It rarely happens of course, but it can. The biggest concern might be the clause that says "We can take any offsetting funds and apply them to your outstanding loan at any time". Hint: Have your savings away from where you have your loans!)
Shift the narrative - good point; Banks create securities. Based on What? Initially, depositors funds (owned by the bank) and secondly money they have borrowed themselves. So digging deeper and looking at depositors funds; what ratio does the bank lend at, 10:1, 20:1? Taking the lower on (10:1) This will mean for every $1000 dollars they have deposited, they are able to loan out $10,000. Now let's look at interest rates; they offer around 3 - 4% (high end) on deposits, but charge around 4 - 5 % on loans. So for that $1000 they are paying $40, but they are getting around $500, by using it as the basis of the securities they issue. Yup definitely not balanced.
One sided indeed. Is anyone suprised?
Regarding options. One can work, earn money and pay tax, and use savings to purchase. Of course the tax treatment and debt based bubble prices make that harder than being enslaved by the bank on its terms. Probably just the way the banks like it.
Yes. And 'back then' Banks were prohibited by law from lending more than ~30% of the main income earners salary - the likelihood of a family coming into the equation was considered etc. Banks could, of course, but if 'problems' occurred down the line then the bank could be done for Predatory Lending.
"~30% Deposit; >30% Serviceability and ~30% Loan to Value". Seemed to work ok!
That fixed interest rate expiry is an odd quirk of home loans, I suspect put in because banks prefer their lackadaisical customers on a higher margin floating interest rate (what is "fair and equitable" again?) From annual renewals of insurance to Netflix subscriptions the default option is renewal...but not home loans. Looks like an obvious swindle to me - and there are numerous others I can easily identify to maximise the rate of separating customers from their hard earned.
"Floating" is just Fixed Rate that expires - every day! At least with, say, 5 years Fixed, a customer can put of an inquest into their actual finances until the maturity date (in theory!), But Floating? A bank can review your circumstances, and act accordingly, on any given day....
Is this a watershed moment for all the mortgage owners suddenly realizing banks can call the loan in at any time?
- including changing the term of the loan Yes, even without your consent
The reason the terms are so bad in the banks favor is that they have a monopoly on debt creation.
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