What happens if my lender goes bust?
If your bank goes bankrupt you still have a home loan debt. It will just end up belonging to another lender.
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Home loan expert David Johnson from thehomeloanguy.com.au says your loan is an asset, and like most assets it can be sold. "The effect is that you do not lose your home, you just get a new lender." If your lender goes bust, your loan is generally sold to another institution. Little more than the internet banking and payment details should 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, only your repayments are given to a different institution.
We asked the Australian Financial Complaints Authority (AFCA) about this and were told by a representative that it’s unusual for a lender to enter into a new agreement with the borrower when a loan is sold. “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’.
Michael Saadat, Senior Executive Leader of Deposit Takers, Credit and Insurers at Money Smart says for all this to be legal, the lender needs to sell all of your loan — not just a portion and, “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.
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. i.e. they may increase them to make it worthwhile in refinancing the loan. Their hope would be you refinance to them and sign a new agreement, they may offer you a rebate or some kind of inducements to stay.”
What about the bells and whistles?
If your lender is in trouble financially, they may restrict or waive loan features like a redraw facility.
“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.
“It may be that a credit provider experiencing financial difficulty would seek to rely on one of these conditions to disallow a debtor from redrawing these funds. If there is a dispute about a debtor's ability to access a redraw facility or another loan feature, this may be raised with an external dispute resolution service.” he continues.
How can a bank go broke?
Historically, Australian banks have fared pretty well. The last century has seen mergers and acquisitions, but few collapses.
The Home Loan Guy, David Johnson, gave this explanation when asked what happens if a lender goes bust?
”I think the easiest way to answer this questions is to look at what happened to RAMS at the start of the GFC. 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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