Problems are persisting over early repayment costs on fixed rate loans.
A financial magazine reported this week that clients of a Christchurch banking consultant had their penalty scaled back by their bank after an ongoing battle about how it was calculated.
As earlier reported on this page, this area is a major source of complaints to the Banking Ombudsman's Office. However, Ombudsman Liz Brown says that one of the problems with early repayment clauses is that "nothing is standard".
"It's a complex formula and there can be a problem in explaining that to customers," she says.
"It's difficult for people to get an idea of how much a penalty is likely to be."
Until recently, most banks charged a set amount for early repayment of fixed loans (such as a month's penalty interest). However, they're now more likely to work out the penalty at the time you repay the loan based on the actual income they sacrifice.
Brown notes that this is fairer and there's also the chance you could benefit if rates were on the way up. However, she says that bank staff need to become more familiar with how these costs are calculated.
"I have had cases where people have been quoted about five different figures in a short spell, and some of those were mistakes."
Brown says the pitfalls are also new because of the way interest rates moved so suddenly at the end of last year, which led to a big gap between fixed and floating rates and large costs for early repayment.
"People do need to realise that taking on a fixed rate loan is, in effect, a gamble," she says.
"The downside is, if you don't stick to the bargain for whatever reason, it's going to cost you."
