Leap year's haymaking boom for bank sector

By MATHEW DEARNALEY

It's leap year and the banks are making hay, reaping about $10 million in extra mortgage interest above their mathematical entitlement for the additional day.

An average householder with a $100,000 mortgage is likely to be paying an extra $20 to $25 in interest, although the flip side of the coin means depositors earn a bit more than usual in a leap year of 366 days.

According to Reserve Bank figures, New Zealanders were mortgaged to the tune of $54.5 billion in 1998.

South Auckland dairy farmer Brian Matheson is not losing sleep over an extra $42.74 he calculates he is being charged on his mortgage, but believes his bank, the ASB, is wrong in principle.

"I don't want to be accused of being measly, but when I talked to the bank about it at [the National Agricultural] Fieldays yesterday they thought it was a bit of a joke.

"I said, "You're diddling me,' and they said, 'Tough, it's a good job we don't have too many leap years'."

Although borrowers could fairly expect to pay an extra day's interest this year, given that there are 366 days, the problem lies with most banks still dividing annual interest by 365 to calculate the daily rate.

This means people with mortgages or other loans pay a bit more than their strict mathematical liability on each of those 366 days - in Mr Matheson's case, just under 12c.

To be fair to the bank, he acknowledges he will earn slightly more interest than in a normal year on a 90-day term deposit - a grand total of 39c which, if the investment is rolled over throughout the leap year, would rise to about $1.60c.

The banks say the law in the form of the 1981 Credit Contracts Act is on their side, and their net gains are minimal as they have to borrow funds at daily rates to lend money to their customers.

ASB marketing general manager Barbara Chapman said customers depositing money with the bank received a benefit equal to the "very small amount of additional interest" paid by borrowers.

The Banking Ombudsman had found the ASB acting in accordance both with standard international banking practice and the terms of its loan agreements, which state interest is calculated on the basis of 365-day years.

But Massey University banking studies director David Tripe said the glitch was not completely cost-neutral for banks, which received "more interest than they pay - otherwise they wouldn't be staying in business."

"It's wrong what they are doing, but I don't think it's a hanging matter."

The banks - a Herald series

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