With the increasing popularity of offset accounts (for example, non-bank lender Firstmac has said that approximately 55 per cent of its borrowers choose to have an offset redraw facility), ASIC recently issued a warning to non-bank lenders to ensure their customers are well aware of what offset features comprise.
As non-banks cannot accept deposits, the warning particularly focuses on highlighting that the offset products, such as offset redraw facilities, aren’t covered by the government’s financial claims guarantee should the lender fail.
A spokesperson for the commission said, “Non-bank lenders that offer mortgages with offset features are not ‘authorised deposit-taking institutions’ regulated by APRA.
“As a result, their offset redraw facilities are not likely to be covered by the government’s guarantee, which covers bank deposits worth up to $250,000 if the lender were to fail.
“Non-bank lenders should provide consumers with detailed information about the nature of the loan product to ensure that consumers are not misled as to the product features.”
Not a matter of concern for borrowers
However, a spokesperson for Firstmac has told Mortgage Business that the warning from ASIC is somewhat redundant.
“Non-bank lenders have been offering offset redraw facilities for decades, long predating the introduction of the government deposit guarantee.
“They continue to offer these facilities, just as banks have continued to offer redraw facilities on their accounts, which are not covered by the deposit guarantee.
“This is not a matter of concern for borrowers because they understand that at all times they have a negative balance with their non-bank lender.”
The spokesperson added that if a lender were to fail, any extra money customers have put in their offset redraw facilities would “simply be deducted from the debt they owe the lender and their net position would be unaffected”.
He added, “Offset redraw facilities are vital for non-bank lenders to provide real competition to the big four banks whose excessive market power is the subject of great public concern.
“It is clear from our website, from the context of the account opening process and the terms and conditions of our loans, that we are not a bank and that our offset redraw facility is not a deposit account.”
Likewise, specialist lender Pepper has also highlighted that money put into its interest offset sub accounts is not considered a deposit, rather a repayment of principal, and is therefore not covered by the government guarantee. However, the loan principal has been repaid.
Mario Rehayem, managing director for Australian mortgages and personal loans at Pepper Financial Services Group, commented: "Since first offering the interest offset sub account feature 12 months ago, Pepper Money has seen approximately 40 per cent of customers take advantage of the feature.
"Pepper Money offers customers a 100 per cent interest offset sub account and visa debit card, which allows clients to reduce the interest payable on their home loan whilst having access to transaction facilities.
"To assist brokers in selling and explaining the feature to their clients, we provide a one page fact sheet on the account feature. In addition, we have a Help Centre article on our website for customers."
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.