Switching between interest rates

July 6, 2016

Everyone wants to own a house. Those who can afford a home loan can obtain a package from their bank, in a move to make their dreams come true.

Many times, not all borrowers have a sound understanding about the different financial products offered by the respective banks. For some, it takes a while in knowing about the bank fees/charges and the different interest rates (such as variable and fixed rates) which are attached with the loan packages.

There are some customers who after obtaining loan don’t bother revisiting their account details. They don’t even go through their bank statements, let alone keeping a tab on market movement in interest rate where the rates have reduced.  So they could consider making an application to their lender for a revised interest rate. Some banks do offer an option of rollover interest rate, whereby, borrowers request for a switch from one type of interest rate to another.

In a case at hand, one such family had sleepless nights and had to run around to sort out their home loan account.  In November 2014, Finau and her family who had a home loan of $93,000 from a commercial bank, with a variable interest rate of 8.2%, decided to try out interest rollover. They were of the understanding that the rollover would make payment becomes more manageable for them.

As an administrative requirement by the bank, Finau had paid his bank (Bank of the South Pacific) $300. She applied for a switch from the current variable interest rate (8.25%) to the proposed fixed rate (4.2%) that was to be activated from 31 January, 2015.

Having made the application, Finau and her family had peace of mind believing all would be well. But Finau’s peace turned into dismay after receiving her first loan statement for 2015. She discovered that the bank had not activated the new proposed interest rate, which was 4.5% lesser value compared to the initial rate.

To her amazement, the interest incurred for that period was higher than what she had expected. As a matter of fact, the difference was quite significant.

Finau was disappointed, as this was not the first time her bank had overlooked the switch to the new interest rate. A similar incident occurred in 2012. The application lodged by Finau was not activated by the bank and she had to lodge another application in December. However, by then seven months had lapsed without any change in the interest rate.

This time around, Finau lodged a complaint with the Council.

Upon our intervention, the bank in question, surrendered and accepted its error. It credited Finau’s account with $2,201.71 as an adjustment for the interest charged based on the revised interest rate.

The Council commends Finau for checking her bank statement after making an application to her bank for a revised interest rate. Had she not done so, she would have continued paying the old rate.

An account holder who wishes to switch between the interest rates should not make a decision based on the lower interest rate. Rather, he/she should apply the interest rate to determine whether the switch fee will result in any savings greater than the switch fee.

Interest Rate Switch does not mean that you are switching from one bank to the other or even swapping between the financial products provided by the bank. Switch is merely making a change from the variable interest rate (which is normally higher) to a fixed interest rate for a specified period of time.

Consumers should question the interest rate and other fees/charges applied to their account if they suspect any irregularities.  Banks, on the other hand, should improve on how they deal with individual accounts to avoid such administrative slip-ups which cause their customers sleepless nights.