Customers complain to Ombudsman about banks' break fees
Low interest rates are driving people to try to break fixed-term mortgages to get a better deal. But some are being stung by fees they did not expect in the process.
The Banking Ombudsman scheme, which deals with complaints about the country's banks, has released its latest annual report.
It shows the scheme received 2458 inquiries in the year, up 2.6 per cent on the year before.
Those inquiries led to 568 complaints, down 1.4 per cent. From there, 259 disputes were received, down 4.1 per cent.
A dispute is triggered when a complaint referred on by the Banking Ombudsman cannot be resolved by the banks.
The scheme investigates disputes and hands down a decision, or helps achieve a settlement. Over the 2016 financial year, 44 per cent of decisions went wholly or partly in favour of the customers.
Lending-related concerns, particularly early repayment charges, made up 31 per cent of cases in the year, up from 28 per cent last year.
Banks often charge early repayment or break fees when customers repay loans before the fixed interest term has expired.
The Banking Ombudsman's report said complaints could arise when customers did not understand when they fixed the interest rate for their loans that they risked being charged such fees, or there was confusion about how banks calculated those fees.
Ombudsman Nicola Sladden said there had been a noticeable spike in complaints about early repayment charges at the beginning of the financial year, between September and November last year.
The number had since declined.
"It's a feature of the low interest rate environment and people trying to obtain competitive rates," she said.
The fee charged is usually the difference between what the customer would have paid in interest and what another customer would pay for the same money if it was lent out again.
If you have $500,000 fixed for another year at 6.5 per cent, for example, the bank will consider that the most it could get for the same chunk of money lent to someone else for the next year is about 4.6 per cent. So it might ask to be compensated for the difference of 200 basis points, or about $10,000 for the year.
Karen Scott-Howman, chief executive of the New Zealand Bankers' Association, said banks were transparent about their break fees and how they were calculated.
"But in an environment where interest rates are at record lows, there will inevitably be customers who with hindsight might have chosen not to fix at higher than today's rates. That's why it is important that customers fully understood the implications of breaking from their contract when they sign up for a fixed-term mortgage," she said.
"Banks work hard to attract and keep their customers, and will work with them to help ensure they have the products that best suits their needs and to help reduce their fees where they can."
The average payment to customers after a complaint was investigated by the Banking Ombudsman was $1730. Almost 40 per cent of disputes resulted in some form of financial compensation.
The biggest payout, of just over $108,000 was in a case where there was dispute over an insurance policy.