Calls for mortgage interest rate audit

by Rebecca Pike03 Oct 2018

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.”

 

COMMENTS

  • by ex banker 3/10/2018 8:55:35 AM

    The Royal Commission is a show for the public, Of course they are only going to investigate conduct the Australian public already suspects,

    The Royal commission has uncovered little that has already been in the press over the past few years. They have scratched the surface and given the public enough to cry foul but not seek blood. Once the commission is complete the report will be released Banks will implement tighter policies and control and Australia moves forward not digging further into the past.

  • by Andrew 3/10/2018 8:57:00 AM

    YEp - another so called expert that has missed the point. If the monthly payment is halved to become the fortnightly payment, this actually pays the loan off quicker, (you actually repay 13 full payments in a 12 month period) and the bank gets less interest. I am sure this is actually in the customers best interest - not the banks.

  • by Patrick McMenamin 3/10/2018 9:01:29 AM

    Another uninformed intellectual poking his nose into a subject about which he apparently knows nothing. It is broadly understood that paying fortnighly intentionally involves paying half the usual monthly instalment each fortnight. This has the effect that an equivalent of 13 months repayments are made each 12 months with a view to acelerating repayment of the loan in affordable small fortnightly extra repayments. The interest included in the installment is the critical calculation not the total repayment. Provided only 14 days interest is charged the extra amount repaid is deducted from the principal outstanding. Further for the second fortnight each month the interest is calculated on a slighly lower balance, again accelerating the rate of repayment of the loan balance.

    The biggest fraudulent act is actually when banks change (trim) the interest rate they are offerring to new borrowers. This is typically is not passed on to existing customers. It is not unusual for a seasoned loan to be collecting anywhere from 1.0 to 2.00% more than the published new business rate. It should be required to disclose this to borrowers and whenever new business rates are lower than incumbent rates the lower rates should be required to be identified as "discount" or "honeymoon" and the date when the rate reverts to standard set out in the loan contract. This secret kind of "bracket creep" must drop hundreds of millions to the banks' bottom lines.