Linked accounts merit fairer deal
OPINION: It is time for a fairer deal for customers with both bank accounts and a home loan at the same bank.
Everyone, whether they have a home
loan or not, needs to have cash savings at banks – ideally enough to cope with three months of expenses.
But, the gap between interest paid on transaction and savings accounts (0 per cent to 0.4 per cent on non-time-locked savings accounts at Westpac) and the interest charged on home loans (3.69 per cent to 5.55 per cent at Westpac) is so wide that maintaining an emergency savings account is expensive.
And yet, for people with home loans, the cost should be zero on at least the first $5000 or $10,000 of cash they have in their everyday and savings accounts.
In their terms and conditions, banks reserve the power to take money from a customer’s transaction, savings, or term deposit account, to pay off part or all of a debt that customer owes to it.
The actual terms and conditions vary subtly from bank to bank.
Westpac’s says:
‘‘If money you owe, or which is payable by you, to any member of the Westpac Group is not paid when due, Westpac may use the credit balance of any of your accounts to either pay off or put money towards the unpaid amount at any time.’’
ANZ’s reads:
‘‘You agree we have the right to use any amounts we owe you to pay any amounts you owe us.
‘‘For example, if you have money in an account with us, this is an amount we owe you.
‘‘We can take that money and use it to pay any amounts you owe us, like fees or any overdrawn amounts in your other accounts.’’
In effect, a person’s home loan is secured both against their home but also any money they have in the bank that they have their home loan with.
I think this entitles home loan borrowers with accounts at the same banks as their home loans, to have home loan interest calculated on the amount they owe on their home loans, minus the amount they have in their accounts.
They would happily forgo the meagre interest on their everyday and savings accounts in return.
Some banks already recognise that there is a level of fairness in this.
For example, Kiwibank charges lower overdraft interest to people with home loans.
This makes sense as the overdraft of a customer with a home loan is effectively secured against the equity in their home.
Kiwibank, Westpac and Bank of New Zealand also have ‘‘offset’’ home loans. People with these offset loans pay interest on their home loan balance, minus the money they have in their everyday and savings accounts.
While that sounds great, offset home loans are complicated, floating rate loans with interest rates at the higher end of the scale, and care has to be taken with them not to end up actually paying more in interest over the term of a loan. Still, they can be used to good effect. I know of one family with wealthy parents who let them offset their home loan against their savings.
Later this year, Commerce and Consumer Affairs Minister David Clark hopes to see new laws requiring banks, insurers and other financial institutions to have fair conduct plans pass into law.
In my book, fair means either routinely offsetting for home loan customers, or paying them higher interest than savers with no home loans, or giving up the right to use money in borrowers’ everyday and savings accounts as security against their home loans.