Post by Roderick on Jun 29, 2008 11:21:47 GMT 12
KiwiSaver fault exposes bank interest-rate ploy
By ROB STOCK - Sunday Star Times | Sunday, 29 June 2008
A technical problem in allowing KiwiSaver funds to be used for mortgage payments has inadvertently exposed a widespread banking rort allowing excessive interest charges on credit cards and personal loans.
KiwiSavers have been told they will have to wait until August for the arrival of mortgage diversion while the government irons out "technical issues", but what they have not been told is that those technical issues include the ubiquitous bank practice of linking customers' "unsecured" debts to their home loan accounts.
This means banks are routinely securing credit cards, overdrafts and other debts against customers' homes, but still charging interest as if they were unsecured.
Such "all-obligations" mortgages include clauses that give a bank the right to pursue a mortgagee sale over unpaid, unsecured credit card debts or personal loans also held at the bank.
The government had banned all- obligations mortgages from the KiwiSaver mortgage diversion scheme, intending to prevent savers using revolving debt facilities to get money out of KiwiSaver before they retired. But it has since emerged that all-obligations mortgages are so standard that the ban would exclude nine in 10 KiwiSavers from using the scheme, according to one highly placed bank executive.
Rachel Baxter from the IRD, on secondment as a technical adviser to Associate Revenue Minister Peter Dunne, confirmed that currently, "a KiwiSaver member will be excluded from the mortgage diversion facility because overdraft or credit card lending is also secured by an all-obligations mortgage over their principal residence".
The current rules, which the banks want changed so they can carry on using all-obligations mortgages, would exclude KiwiSavers who had credit card and personal loan debt, as well as those who did not but who had mortgages that allowed any future debts they incurred with the bank to be secured against their home.
While this is a spanner in the KiwiSaver works, the practice shows home- owners with all-obligations mortgages are paying way over the odds for their credit card and personal loans.
The average standard rate credit card charges interest at 21.14%, a high rate lenders justify by arguing the borrowing is unsecured. But because the card debt is tied to the mortgage, this is virtually double what it should be. The average rate for a floating revolving credit mortgage secured over a property is 10.69%.
Banks charge an average 18.11% for personal loans, an extra 7.4 percentage points, again for a loan that is effectively secured.
Kiwibank is not included in the last calculation as it knocks three percentage points off personal loan rates for its home loan customers, recognising the value of the extra security it has through an all-obligations mortgage.
Banks defend the practice as they say it allows home loan customers to borrow more, and some say they do not enforce their rights on some forms of debt. ANZ and National Bank both use "all obligations" mortgages, but a spokeswoman said its policy was not to enforce security for credit card debts.
The Bankers' Association is confident KiwiSaver rules will be changed to allow them to continue overcharging. In a statement, chief executive Alan Yates said: "The good news is that the Inland Revenue is working with the association on proposed amendments to change the regulations."
Mortgage diversion, which was designed to make KiwiSaver more attractive to people with mortgages, was due to begin on July 1.
By ROB STOCK - Sunday Star Times | Sunday, 29 June 2008
A technical problem in allowing KiwiSaver funds to be used for mortgage payments has inadvertently exposed a widespread banking rort allowing excessive interest charges on credit cards and personal loans.
KiwiSavers have been told they will have to wait until August for the arrival of mortgage diversion while the government irons out "technical issues", but what they have not been told is that those technical issues include the ubiquitous bank practice of linking customers' "unsecured" debts to their home loan accounts.
This means banks are routinely securing credit cards, overdrafts and other debts against customers' homes, but still charging interest as if they were unsecured.
Such "all-obligations" mortgages include clauses that give a bank the right to pursue a mortgagee sale over unpaid, unsecured credit card debts or personal loans also held at the bank.
The government had banned all- obligations mortgages from the KiwiSaver mortgage diversion scheme, intending to prevent savers using revolving debt facilities to get money out of KiwiSaver before they retired. But it has since emerged that all-obligations mortgages are so standard that the ban would exclude nine in 10 KiwiSavers from using the scheme, according to one highly placed bank executive.
Rachel Baxter from the IRD, on secondment as a technical adviser to Associate Revenue Minister Peter Dunne, confirmed that currently, "a KiwiSaver member will be excluded from the mortgage diversion facility because overdraft or credit card lending is also secured by an all-obligations mortgage over their principal residence".
The current rules, which the banks want changed so they can carry on using all-obligations mortgages, would exclude KiwiSavers who had credit card and personal loan debt, as well as those who did not but who had mortgages that allowed any future debts they incurred with the bank to be secured against their home.
While this is a spanner in the KiwiSaver works, the practice shows home- owners with all-obligations mortgages are paying way over the odds for their credit card and personal loans.
The average standard rate credit card charges interest at 21.14%, a high rate lenders justify by arguing the borrowing is unsecured. But because the card debt is tied to the mortgage, this is virtually double what it should be. The average rate for a floating revolving credit mortgage secured over a property is 10.69%.
Banks charge an average 18.11% for personal loans, an extra 7.4 percentage points, again for a loan that is effectively secured.
Kiwibank is not included in the last calculation as it knocks three percentage points off personal loan rates for its home loan customers, recognising the value of the extra security it has through an all-obligations mortgage.
Banks defend the practice as they say it allows home loan customers to borrow more, and some say they do not enforce their rights on some forms of debt. ANZ and National Bank both use "all obligations" mortgages, but a spokeswoman said its policy was not to enforce security for credit card debts.
The Bankers' Association is confident KiwiSaver rules will be changed to allow them to continue overcharging. In a statement, chief executive Alan Yates said: "The good news is that the Inland Revenue is working with the association on proposed amendments to change the regulations."
Mortgage diversion, which was designed to make KiwiSaver more attractive to people with mortgages, was due to begin on July 1.
