Monday, November 15, 2010

That bit of your mortgage contract about interest? Unenforceable.

There's a chance a key part of your mortgage contract is unenforceable. A Sydney lawyer considering a class action has obtained a Senior Counsel's opinion suggesting the interest clause in the typical Australian variable rate contract is potentially invalid because it leaves the interest rate completely uncertain.

"I have concluded that it is not possible for a bank to reserve to itself a right to vary the interest rate on a loan so as to set whatever interest rate the bank chooses," writes Senior Counsel Christopher Birch in the opinion dated December 23, 2009. "I have further concluded that an attempt by a bank to reserve to itself an entitlement to vary an interest rate by whatever means it pleases would be contractually void."

John Mahony of Mahony Dominic Lawyers commissioned the opinion after Westpac last year trumped a Reserve Bank 0.25 point increase its cash rate by lifting its standard variable mortgage rate 0.45 points.

He has shown the opinion to the Herald as each of the big four banks has once again increased its standard variable rate without deferring to the Reserve and as Greens Leader Bob Brown announces new plans to legislate for a 24 month freeze on rate rises exceeding those of the Reserve...

Australian variable rate contracts are unusual in that unlike those in other leading nations they purport to allow the lender to adjust rates as it likes.

Asked by Mr Mahony whether there was an implied understanding in the Westpac contract that it would move its rate in lockstep with the Reserve, Senior Counsel Christopher Birch found there was not, but that that very uncertainty created the possibility the interest clause was invalid.

"I cannot suggest that such a finding would clearly be mad. I have however expressed the view that in light of the determinations that have previously been made by Australian courts on interest variation terms, coupled with the general principles expressed by the High Court... this is the better view," his advice says.

The Westpac contract examined by the Senior Counsel allowed it to vary "without your consent" the interest rate charged, the loan term, the credit limit, the amount of credit, the amount and frequency of repayments, the fees charged and the time for their payments and the penalty for a default.

The only constraint on Westpac was the requirement to publish its intention to make the changes in an advertisement in the Australian Financial Review every second Monday.

Senior Counsel Birch notes that if the High Court did find the interest clause invalid by reason of uncertainty much of the loan contract would still be valid, including that that required the repayment of principal.

Greens Leader Bob Brown yesterday challenged Labor and the Coalition to back him in stopping the banks lifting interest rates beyond official rate rises for two years.

"Sound and fury is not good enough. This is hurting people. We are now putting both the big parties on notice," he said.

Treasurer Wayne Swan said he "understand the frustration in the Australian community at the arrogance" of the Banks and did not "doubt Bob's motives".

"I do doubt his methods, and I doubt Mr Hockey’s motives and his methods because they're based on cheap-jack opportunism," he said.

Published in today's SMH

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