A professor has said the interim report of the Royal Commission has missed “the biggest fraudulent act” carried out by banks when it comes to calculating mortgage interest.
He is now calling on the commission to complete a forensic audit of the mortgage interest calculations of a sample of mortgage loans from all banks.
The interim report was released last Friday by Treasurer Josh Frydenberg, who said the report showed that “banks and other financial institutions have put profits before people”.
But Professor Janek Ratnatunga, CEO of the Institute of Certified Management Accountants (ICMA) said the greed mentioned in the report and the poor practices seen during the hearings were only the “tip of the iceberg”.
He said, “The biggest rort that appears to have gone undetected is the way banks use basic finance annuity equations to calculate monthly mortgage principal and interest repayments and the interest on deposits into offset accounts.
“The finance equations used to calculate the mortgage interest by banks are either erroneous, or are skewed to provide answers always in the bank’s favour at the expense of their customers.”
Professor Ratnatunga has collected examples where a mortgagee’s monthly interest and principal repayment stated in his or her bank mortgage statement was different to that obtained by using that bank’s own loan calculator.
In one case, the borrower had elected to repay the interest and principal fortnightly and the bank simply halved the monthly rate.
Ratnatunga approached the bank to say that as the principal is being repaid at a faster rate, just halving the monthly rate is incorrect.
The bank said it had changed the method of calculation in February of this year and Ratnatunga said he believes this was due to the pressure being applied to banks by the Royal Commission.
He added, “Even if the banks use the correct equations, how they apply these equations when interest rates change is always in the bank’s favour. When interest rates go up, the change in mortgage interest payable is applied immediately; but when interest rates go down, these are only applied from the beginning of the next monthly cycle date of the loan.”
Ratnatunga accused the banks of hiding these calculations with ‘incomprehensible mortgage loan statements that lack any semblance of transparency’.
Calling the Royal Commission to audit the calculations, he added, “The ideal time to do such an audit is when the bank is asked to provide a final discharge amount on the termination of a loan. If given access to bank records, a simple calculation by a finance expert will indicate if the discharge amount is correct, or if it’s substantially in the bank’s favour.”