Economic Cost Provisions in Fixed-Rate Home Loan Contracts and Breaches of Australian Consumer Law

Fixed-rate home loan contracts in Australia usually include a clause in terms of which the financial institution providing the loan can recover what is variously called an ‘economic cost’ or an ‘early repayment adjustment’ if the borrower repays the loan before the fixed term ends, in circumstances where bank funding costs have declined. In their calculation of such costs, financial institutions rely on movements in the Australian Bank Bill Swap Rate (BBSW) as an indicator of funding costs. However, market data indicates that the BBSW is an inaccurate measure of actual funding costs and that the BBSW can in fact decline when funding costs have increased. Furthermore, it can occur that the rates at which a financial institution is lending money for home loans can exceed the rate being paid by a borrower who is paying their loan early, with the consequence that the financial institution has an opportunity to mitigate its loss by re-lending the funds that have been repaid. Yet such mitigation is not taken into account by financial institutions in calculating economic costs. The result is that banks recover more than their actual losses when loans are repaid early. This breaches both the common law and Australian statutory consumer law. The article urges that the corporate regulator, the Australian Securities and Investment Commission, investigate such practices and if bring a test case on behalf of consumers to have such practices declared unlawful.