Despicable ME and the tale of the redraw facility
Recent attempts by ME Bank to change the operation of redraw facilities for some of their borrowers have highlighted the key differences and contract risks between a redraw facility and an offset account.
Below is an explanation of the recent issue and how you should be thinking about using a redraw facility.
What’s the difference between an offset account and redraw?
A redraw facility works differently to an offset account. With a redraw facility, you can make additional payments to reduce the outstanding balance of your mortgage, which in turn reduces the amount of interest you pay on your home loan. The difference between your scheduled home loan balance and your actual home loan balance is known as redraw. The amount of redraw you have available will reduce over time to ensure you pay off your loan within its contracted term. Conversely, in the case of an offset account, the balance of the offset account is subtracted from the outstanding balance of your mortgage, and you only pay interest on this difference. Unlike redraw, funds deposited in an offset account will not reduce over time.
Unexplained risk of a redraw
What is not explained by lenders is that their terms and conditions state that it is up to the discretion of the lender to determine the available redraw amount and if it should be changed. Although there are some consumer protections provided by the government, this allows lenders to make unilateral changes as it sees fit.
In the case of ME Bank, they unilaterally changed their methodology of calculating the available redraw amount. This had the effect of reducing the redraw available to some of their clients.
ME Bank’s reason for the changes was not entirely clear, but they had stated that their original calculation methodology was technically incorrect, and they did not intend to adversely take advantage of their customers. Despite this and following public scrutiny and requests by APRA, ME Bank subsequently reversed the changes.
What does this mean for me?
The ME Bank issue highlights the risk lenders changing your available redraw amount.
When considering whether you should use a redraw facility over an offset account, you should also take into account the risk of possible future changes by your lender to the calculation of the available redraw amount. Unlike a redraw facility, an offset account is a clearly separated account that is always available to you.
Should you wish to discuss the pro and cons of using an offset account or draw facility, do not hesitate to contact us to speak to an adviser.
Further information: Flexibility options