Credit card shock for holders of mortgages

The credit-card borrowing of thousands of people is secured against their homes, in most cases without their knowledge, says Banking Ombudsman Liz Brown.

And despite the security provided by the home, the borrowers are paying high interest rates consistent with unsecured lending, says her annual report, released this week.

"Most standard mortgage documents ... stipulate that the security given, usually in relation to a home loan, also secures all other debts - past, present and future - that may be owed by the mortgagor to the bank," says Brown.

"Few customers realise that the mortgage agreement ... means that banks can legally recover debt on their credit cards from whatever they have offered as security for their mortgage - usually their home."

Customers do not usually perceive credit card debt as a form of secured debt, Brown reports, and banks "certainly do not charge interest rates on credit card debt at the low rates normally associated with a secured debt".

Westpac, National Bank and its owner ANZ say they do not secure credit card debt against customers' homes, but ASB Bank and BNZ do.

ASB's Ross McEwan said higher interest charges on credit card borrowing were more to do with the access, flexibility and services offered than whether it was unsecured.

A BNZ spokesman said the practice was not to insist on the repayment of outstanding credit card balances at the time a mortgage was discharged unless the card payments were in arrears or the bank feared it would not be repaid.

Brown said the issue emerged from a handful of cases where people, on the sale of a house, found they were having to repay credit card debt that they had never thought was secured against their home.