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Banks will continue to charge sky-high home loan break fees - often reaching tens of thousands - until there is a legal test case or intervention by Parliament, says the outgoing banking ombudsman, Liz Brown.
Rapidly falling interest rates prompted a wave of struggling homeowners locked into high long-term fixed-rate mortgages to approach their bank about moving to the lower rates available to new borrowers. But in many cases banks charge existing customers tens of thousands to change their loan terms.
Brown, who last week announced she's stepping down from the job after almost 14 years, says banks are entitled to charge break fees but they must be reasonable, reflecting the actual cost to the bank of breaking the loan.
Customers who suspect they are being rorted appear to have nowhere to go, as the law is unclear on what the bank is allowed to take into account when calculating this cost.
"I think we will have to have either some amendment to the law or a case before the courts because it's not something an ombudsman or the Commerce Commission can decide," says Brown.
A break fee is calculated on the size of the mortgage, its remaining fixed term when it is repaid and how far interest rates - either customer or wholesale rates - have fallen since it was fixed. ASB, BNZ, and the National Bank calculate the break fee off how far customer interest rates have fallen since the mortgage was fixed, which is not as far as wholesale rates have as a result of the credit crisis.
ANZ, Westpac and Kiwibank calculate the break fee off wholesale interest rates, which makes their break fees higher.
The break fee calculation is complicated, says John Bolton, principal of Squirrel Financial Solutions. Essentially, for every year remaining on their fixed-term loan, borrowers can expect to pay roughly $1000 per $100,000 borrowed for every 1 per cent fall in rates.
So, if interest rates fall by 2 per cent, a customer with a $400,000 mortgage on a five-year fixed rate with three years still to go will face a penalty fee of around $24,000.
The lower the floating rate drops, the bigger the break fee, says Massey University director of banking studies, David Tripe. "What the banks have been saying - or should have been saying - is that it may be cheaper to break your fixed rate now than it will be tomorrow, or next month."
The Productive Economy Council says the government should standardise break fees and the formula so it's made simpler for customers to understand. It proposes that the costs of breaking fixed-term mortgages should be split three ways - between mortgage holders, their banks and the government.
Spokesperson Selwyn Pellett says: "People on fixed mortgages often can't reduce their costs in any significant way so they stop spending and we all tumble into a recession since 80 per cent of mortgages are fixed.
"I can't imagine a stimulus package that could put more money into the economy and help as many people as this single initiative."
But Finance Minister Bill English told the Herald on Sunday there are "no plans" for legislative intervention.
Brown says in these troubled times, her office has seen "historically new" levels of debt-related complaints. Case numbers to her office were up 37 per cent year-on-year - most of them over investment advice - Brown revealed in her last annual report.
She expects the rise in complaints against banks to continue until "we see some signs of a global recovery".
Approaching her 66th birthday, she thinks she has been in the job "long enough", and wants more time in the garden, reading and perhaps doing a spot of consultancy.
"The office is moving into a new era," says Brown. "It's time to hand over to someone who can take a new approach," perhaps overseeing expansion of the scheme to take in other financial service providers.
The softly spoken Brown considers herself a Kiwi, although jokes that her "Pommie accent" has persisted since her arrival from Britain in 1972.
She holds a law degree from Oxford University, where she was one of eight women law students among 300 men.
Oxford in the 1960s was "an extremely interesting place, academically and politically", but after graduation, dealing with some of the judges and clients was sometimes difficult.
One elderly court clerk felt bound to "protect his judge from the depredations of women lawyers. He used to eye our hemlines, which, being the 60s, were growing higher by the day, and I could see him feeling we were totally indecently dressed."
Drawn here by her passion for mountain climbing, Brown settled in Christchurch with her husband and 2-year-old son, but found the local legal profession unwelcoming.
She rejoined the workforce after the births of two daughters, following "the New Zealand woman's career path: Plunket, playcentre, school then local government, eventually".
That local body experience led to her working for the parliamentary ombudsman's office and finally to the position of banking ombudsman, which she describes as an investigatory role with a focus on "resolving complaints by agreement or facilitation - if you can".
Brown has a good track record.
She has only made three compensation awards against banks, and recalls one complainant being so chuffed with a successful outcome they wanted to add her to their will.
"If I have not been able to negotiate a successful agreement and convince the bank to do what is right by its customer, then I've failed in what I set out to do."
Among successes, she counts the widening of her jurisdiction to award compensation for things other than pure financial loss, and bolstering independence of the banking ombudsman scheme by moving all decision-making to its board so the industry no longer has the power to influence it.
The banking industry has changed "out of all recognition" she says, having taken up the post before telephone and internet banking.
"It went through a phase of becoming much less customer service-focused," Brown says, but it has now swung back.
