What happens if my mortgage provider goes bankrupt?

The Australian mortgage market today has a range of bank and non-bank mortgage providers all competing for your mortgage business.

While this level of competition can result in competitive interest rates, there’s still a misconception about whether a non-bank is as safe as a bank when it comes to your mortgage.

So it makes sense to understand the basics of how a mortgage contract works, how a bank and a non-bank mortgage provider make money from a mortgage contract and what happens if your mortgage provider goes bankrupt.

Read in this article:

Show me the money

In simplistic terms, both types of funders make their money from home loan repayments.

• A funder lends money to a borrower at a higher interest rate than the rate they are charged to borrow on the wholesale loan market.

The difference in the rate pays their operating costs and creates profits.

Why would you use a mortgage broker (AKA credit assistance provider) and not go directly to a bank or a non-bank?

That answer is simple, but don't miss its striking importance.

• A mortgage broker is required by law to act in the best interests of their client.
• A bank and a non-bank is not required to act in their client's best interests.

Important: A Bank or Non-Bank Lender is not required by law to act in your best interest like - a Mortgage Broker.

What is the Best Interests Duty for mortgage brokers?

The best interests duty for mortgage brokers is a statutory obligation requiring them to act in the best interests of consumers (best interests duty), and to prioritise consumers’ interests when providing credit assistance (conflict priority rule).

What happens to my mortgage if my mortgage provider goes bankrupt?

The quick answer is;

• Your mortgage contract would simply be sold to another bank or non-bank lender and continue in a similar fashion as set by the contract.
• You would continue to make your repayments as agreed, or you'll simply refinance to another lender whenever you wanted to.

The long answer is;

• You need first to understand the difference between a term loan and an at-call loan facility.

There is a critical difference between a term loan and a business at-call loan facility.

• A term loan is a contract with a borrower over a set period of time for the repayment of the agreed amount. The lender simply on a whim cannot ‘call up’ your mortgage for full repayment - meaning they can’t ask you to pay the remaining of your loan in full before the term of the loan expires.
• An at-call mortgage facility (some would say the scourge of the small business community) is a mortgage that can be called upon for full repayment at the whim of the funder, hence the name ‘at call.’

Why would people choose an at-call mortgage facility over a term loan?

The reasons can be wide and varied but usually, come down to either lack of choice or inexperience.

• These at-call loans are usually sold to small business owners under the guise of bundled convenience of an EFTPOS facility + a home mortgage + a small business line of credit.

Once the tentacles of a big bank have control over all the small business owners' finance facilities, they can use the ‘at call’ provision to keep strong control over the borrower and lock them into a credit facility that is the lowest risk to the bank and the highest cost and risk to the small business borrower.

What happens to my savings in my mortgage offset account if my mortgage provider goes bankrupt?

During the Global Financial Crisis, the Australian Government implemented a government guarantee (AKA Financial Claims Scheme – FCS) on all savings in a bank or credit union to the value of $250,000.

• In practical terms, this provides a government guarantee of up to $250K per deposit.

If a funder were to go bankrupt, the government would guarantee savings of an individual to that amount.

• This guarantee applies to and protects funds held in a linked 100% offset account to a mortgage – as it’s considered a savings account.
• This guarantee does not apply to additional repayments made into a loan against the outstanding principal base –  as this is considered an advanced repayment.

You can check if your savings account provider (the technical term is Approved Deposit Taking Institution or ADTI) is listed on the government's guarantee list here.

Pro Tip: You need to be aware the FSC guarantee extends only to a single ADTI so for those multi-brands like Westpac & St George and CBA & Bank West, the total per guarantee is $250K to the held bank license and not each individual sub-brand.

So tell me again, what happens if my mortgage provider goes broke?

• On term loan mortgages, if your current mortgage provider goes broke

They can:

• simply sell the mortgage repayment contract to another funder.

This was the case when the non-bank lender RAMS was sold to Westpac, and Wizard Home Loans was sold to GE Money in 2004 for $500 million.

You can...

• Simply refinance the loan contract to another funder, whenever you’re ready.

Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn.  Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.