A mortgage broker acting for the couple sent the bank instructions to prepare fixed interest rate loan documents. When they signed the documents, the bank officer reminded them about the loan contract clause regarding early repayment charges. They did not seek more information about the likely cost of repaying a fixed rate loan early.

Months later, interest rates began to fall. Ravi and Hana decided to break the contract and revert to a floating interest rate. They were upset to discover it cost them several thousand dollars.

Our investigation

They complained to us that the bank had not given them sufficient warning of the likely cost of early repayment. Had they understood the likely size of the charge, they might not have entered into the fixed rate contract. They wanted the bank to reduce or waive the charge.

We found the bank had met its obligations when it drew the couple’s attention to the possibility of a charge if they broke the contract early. We did not accept their argument that the bank should have warned that the cost could be substantial. There is no way to establish in advance whether there will be a charge, or what its size may be. This will depend on whether interest rates rise or fall in the intervening period. If interest rates had risen, there would have been no early repayment charge.

Outcome

Ravi and Hana remained unhappy about the charge and did not accept our view.