Read the scary fine print

Borrowers with a redraw facility should be aware what their bank can do

Afew customers hit the panic button when the Commonwealth Bank announced changes to its redraw facilities in August. The fuss centred on the bank’s ability to take money out of your redraw facility if you are behind with your repayments.

While the bank could have done a better job explaining the changes, what it was proposing wasn’t too crazy. Put simply: if you chose to reduce your repayments because you put some money in your redraw facility but then you decided to take the money out again, your reduced repayments will no longer be enough to pay off your debt in the agreed time.

As a result the bank will use your redraw money to catch up.

Now while I’m not too fazed about this change – after all, you don’t want to pay any more in interest or take any longer to clear your debt than you have to – there are a few other things about redraw facilities that should concern you.

There’s this little clause that I found in Westpac’s redraw authority: “The lender may refuse any request for a withdrawal at any time. The lender may also cancel your redraw option at any time, but will tell you if it has done so.” Or this one with StGeorge: “The bank does not promise it will relend you the redraw amount. This request is subject to its consent.”

By no means are these two banks alone. You’ll find clauses like these are common across most lenders.

Alexandra Kelly, principal solicitor at the Financial Rights Legal Centre, warns borrowers to read the fine print and be aware of any ability of the lender to unilaterally cancel the redraw or limit the amount you can redraw. “If your lender can restrict your access to the redraw, then there is a risk they will exercise that right in future,” she says. While offsets are certainly less of a risk, there are a few things that you ought to know about this facility too.

“The first thing home loan customers should consider is whether the cost of having an offset is worth paying a higher rate,” says Sally Tindall, from research comparison site RateCity.

NAB, for example, has a base-rate variable home loan at 3.69%. It comes with a redraw facility but you cannot attach an offset account to this product. If you want the added benefit of an offset, you are forced into a loan with a much higher rate. And as Tindall points out, you may even pay a monthly or annual fee for it. “Most commonly banks offer customers packaged mortgage deals with offset accounts charging an annual fee of $395,” she says. “Over a 30-year loan, that adds up to $11,850. There’s little point paying a higher rate and annual fee for the privilege of an offset account if you don’t keep any money in it to reduce the interest on your home loan.” Having said that, there are currently 255 owner-occupier loans on the market with offsets and a rate under 4%, so the tip here is to make sure you’re not paying more than you have to.

At first glance redraw and offset look very similar, as they both essentially do the same thing: reduce the interest and term on your home loan. If you have a $400,000 mortgage with $50,000 in your offset or redraw, you pay interest on $350,000. The main difference is that the redraw facility is part of your home loan, whereas an offset is a separate transaction account linked to your loan.

The other point to note with offset is: how safe is your money in the offset facility if your mortgage is with a non-bank lender? Deposits of up to $250,000 are guaranteed by the federal government if they are with an approved institution (this includes banks, building societies and credit unions).

But if an unapproved institution goes belly up, there’s no government guarantee on the money in your offset facility. However, chances are your entire loan will be on-sold to a different lender so your money in the offset will more than likely go towards reducing your debt. Again, it’s not the end of the world but if you’ve been saving that money for your child’s education or a well-earned holiday it can be the end of your financial dream.

As always, the devil is in the detail.

Finance expert and author of The Great $20 Adventure, Money’s editor Effie Zahos, appears regularly on TV and radio. She started her career in banking.