Finding the right formula

Westpac is under fire for trying to ratchet a homeowner's mortgage break fee by more than 500 per cent. Photo / Martin Sykes

Westpac - under fire for demanding almost $100,000 from a homeowner needing to change the terms of his mortgage - is one of three major banks being investigated by the Commerce Commission for the way it calculates break fees.

Three banks - ASB, BNZ and the National Bank - have been cleared by the Commission but it is still looking into the complex formulas used by ANZ, Kiwibank and Westpac.

David Gordon faces losing his central Auckland apartment after Westpac reneged on written advice that he would be charged no more than $100 and three months' penalty interest to change the terms of his mortgage.

He says the bank's break fee formula is so complicated that borrowers cannot understand what they are agreeing to.

Gordon's story - reported in the Herald on Sunday last week - ended with a complaint to the Banking Ombudsman. The bank upped the fee to re-set his mortgage from the $16,000 he expected to $67,000 and ultimately $97,000 as their dispute over advice he had received by email from Westpac dragged on.

He says borrowers can't calculate the cost of breaking a fixed-rate mortgage because the bank's formula requires access to information the banks don't divulge.

A Westpac document setting out its complex formula for determining break costs shows that the bank's "hedge rate" is central to the calculation.

A hedge rate is the rate at which the bank determines it can get fixed-rate funds from the wholesale money market, and this is frequently changing.

Westpac told Gordon that it would not disclose the hedge rate to its customers.

Gordon says this means a borrower is "entering into a contract that attempts to impose undisclosed financial obligations".

Westpac spokesman Craig Dowling refutes this and says the bank stands by its break fee formula and processes.

"It is made clear that if anyone seeks to break from an agreement, if there is a loss to the bank that loss will be passed on. No one can state in advance what that loss will be," he says.

The law allows banks to recover reasonable costs associated with breaking a mortgage. They are calculated on the mortgage size, its remaining fixed term when it is repaid and how far interest rates have fallen since it was fixed.

Problems arise because banks use varying formulas to calculate those costs.

ASB, BNZ, and the National Bank calculate the break fee off how far "customer" interest rates - those the bank advertises - have fallen since the mortgage was fixed.

ANZ, Westpac and Kiwibank calculate the break fee off "wholesale" interest rates - the rates banks pay to borrow from elsewhere. This meant that a year ago when the recession and global financial crisis combined to see interest rates fall quickly, their break fees were higher.

Consumer NZ chief Sue Chetwin says while banks are entitled to collect the cost of customers breaking their fixed-term loans, she does not think Westpac's break fees based on wholesale rates are fair. In Gordon's case, she says, Westpac "stuffed up" by sending him an email before they signed the contract that said the fee to break it would be $100 plus three months' penalty interest.