ME Bank saga: is it okay for banks to slash redraw balances?


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ME Bank has come under fire after customers received letters telling them the redraw balances on their mortgages had been significantly cut without any warning.

One letter from ME Bank, seen by Money, showed a customer's redraw balance had been cut from $92,700 (as at April 17, 2020) to $76,200 on April 23, 2020 (or by $16,500).

The customer, who has less than $10,000 remaining on their mortgage and has been an ME Bank customer for more than a decade, received the letter days after the redraw balance had been lowered.

me bank mortgage redraw

Compounding the confusion, this customer hadn't had any communication from the bank about their redraw balance changing for at least 12 months.

The customers impacted by ME Bank held what the bank terms "legacy home loans" written more than five years ago.

Centaur Financial Services managing director and financial adviser Hugh Robertson points out ME Bank might have just passed on the problem to its owners, 26 industry super funds.

"If these customers suddenly can't access this money and they need $10,000, guess where they're going to get that $10,000 from now?" says Robertson.

"They're going to take it out of super. Instead of taking it out of cash, they're now taking it out of devalued assets."

For Robertson the move to suddenly take away redraw facilities from people paying off mortgages is not in anyone's best interest.

In ordinary circumstances, he says, people see redraw facilities as savings. And even a financial adviser would see it that way.

"People see a redraw as a backup cash reserve. They see it as something they can use for a holiday, for their kids' educations, for renovations," says Robertson.

"Slashing redraw balances greatly disadvantages people. And these people thought they had a very vanilla, ordinary lending feature."

That said, Robertson prefers to see his clients have offset accounts.

A redraw balance means that as you pay down your loan the bank allows you to draw a portion of that back out again; an offset account is a separate bank account that offsets the interest you would pay on your loan.

A bank can apply restrictions as to how the redraw feature works, including turning it off or limiting your redraw amount, and redraw fees may also apply.

Robertson says it's not uncommon for people, even professional financial advisers, to not really understand the difference between a redraw facility and an offset account.

But, he says, a bank could never absorb an offset account into a customer's loan.

Part of the pain for ME Bank mortgage customers comes from the fact that many would have been paying off their loan at a much faster rate than they otherwise would have due to the benefit of having a redraw balance, Robertson says.

"You think why would you have your savings in a bank account earning less than 1% interest when you could put it towards your loan where you pay 4% interest, knowing that you have that redraw there," he says.

ME Bank says it is in the process of contacting affected customers to see if they need additional support.

"We understand that the change has caused concern to some customers, particularly in the current environment," a spokesperson for the bank says.

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Elizabeth McArthur was a journalist at Financial Standard from March 2019 to April 2022. She has a bachelor's degree in journalism from UTS and a master's in creative writing from Melbourne University.
Nicholas Seaman
May 6, 2020 5.21pm

You actually haven't answered the question you pose which is a shame as I would have been interested in your opinion

Gary Kirby
May 6, 2020 7.53pm

I agree Nicholas Seaman - what is the answer to the question, "is it okay for banks to slash redraw balances?"

Money magazine
May 7, 2020 7.46am

Hi Gary,

As the story says, a bank can apply restrictions as to how the redraw feature works, including turning it off or limiting your redraw amount.

- Money team

Amy Thiele
May 7, 2020 10.22am

Is it okay? Technically yes. There should be a term in the PDS regarding this though. I know our bank does, which is why I would never park savings in a redraw. They have the right to change the terms AT ANY TIME, WITHOUT NOTICE.

Is it the right thing to do, especially when there is a pandemic happening? No. Hence you should opt for an offset if you have a considerable amount of savings you want to utilise to minimise interest on your mortgage. Which will often cost you an annual and a monthly fee, plus incur a higher interest rate...something only you can weigh up.

Make sure you read and understand your contract.

marilyn burns
May 7, 2020 4.50pm

me bank has also done this to me without any notification they reduced my redraw by 24000$

Bernie Schelfhout
May 9, 2020 5.22am

It sounds like people are catching up with the bad behaviour of ME Bank? Is it limited to their loans department? Or is it outside of their loans department? Where's that Royal Commission into banking when you need them? Did they look into banks beyond the big four? They should have! Keep digging. Once upon a time ... they were a great bank. Money/Elizabeth McArthur can you please answer these questions for us all?

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