What happens if my lender goes bust?

To you, your home loan is a dent. To lenders, your loan is an asset – and like most assets, it can be sold.

So if your bank suddenly goes bankrupt, in most cases, it won't mean you get a free pass on your mortgage.

"The effect is that you do not lose your home, you just get a new lender," confirms home loan expert David Johnson from The Home Loan Guy.

What will likely happen is:

• If your lender goes bust, your loan will be sold to another institution.
• Not much will change for you, other than internet banking and payment details.
• Your account numbers may change when your loan is transferred.

If your mortgage contract is transferred to another bank, your current agreement will stay the same as it is, in terms of loan size, term and interest rate.

We asked the Australian Financial Complaints Authority (AFCA) to confirm this, and a representative confirmed that "the loan agreement can be changed, but only in accordance with the terms of that (original) agreement.”

Borrowers in default may have their debt ‘accelerated’ – what does that mean?

Michael Saadat, ASIC's senior executive leader of Deposit Takers, Credit and Insurers, says for all of this to be legal, the lender needs to sell all of your loan — not just a portion.

Also, “express written notice of the assignment must be given.”

Saadat points out that if your lender goes bust, they can’t make you pay your loan out early. The exception is if you’re in default. There is such a thing as an ‘acceleration clause’.

“If a debt is "accelerated, the full amount becomes due and payable immediately. It should be noted that an acceleration clause can operate only where a debtor is in default,” Saadat says.

He adds that there may be warning signs that your lender is in trouble.

"A credit contract may contain a redraw facility. The ability of a debtor to redraw funds paid in advance is usually subject to certain contractual conditions," Saadat says.

"A credit provider experiencing financial difficulty [may] seek to rely on one of these conditions, to disallow a debtor from redrawing these funds."

In other words: they don't want to release the funds to you as they're running short themselves, so they enact the clauses that allow them to hold on to your funds. This is one of the reasons why an offset account can be a better product than a redraw facility.

What about the interest rate?

Once the loan assignment is made, or in other words, the loan is sold to a new lender, your interest rate may move up or down depending on how the new lender sets, and adjusts their rates.

David Johnson says that the lender may even offer an incentive to keep the borrower’s business once the loan once the assignment is made.

“They can change your interest rates and fees. They may increase them to make it worthwhile in refinancing the loan," he explains.

"Their hope would be you refinance to them and sign a new agreement, so they may offer you a rebate or some kind of inducements to stay.”

Of course, if you don't like the home loan terms and condition they offer you, you are able to shop around for a better deal.

Finder survey: In general, do Australians trust banks and lenders?

How can a bank go broke?

Historically, Australian banks have fared pretty well. The last century has seen mergers and acquisitions, but few collapses.

It's therefore very unlikely for your lender to go bust.

But there have been a few that have come very close, Johnson says.

”I think the easiest way to answer this question is to look at what happened to RAMS at the start of the GFC," he says.

"They generally got their money from big American intuitions on short term contracts to lend to Australians for home loans. Every 30-60 days, they would have to refinance their entire business loans. And when the GFC hit, the American institutions had no money to invest.

"At first, they did not want to reinvest their money – even more of an issue was that they wanted their money back. The only way out for RAMS was to sell, but their customers did not lose their homes. Their home loan was now with ‘RHG’, not RAMS.”

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