ME Bank saga: is it okay for banks to slash redraw balances?
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.
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.
Get stories like this in our newsletters.