What happens to your home loan if your bank goes bust?

For most Australians, home ownership is the ultimate symbol of security. But a lot could happen before your mortgage is paid off and your home is officially yours.

One worst case scenario is your bank going under. While Australian banks are quite well regulated, it’s only natural to wonder what would happen if you had a home loan with an institution that suddenly went bust. 

What happens to my home loan?

If your bank goes under, your debt won’t disappear with it — as appealing as that would be. Rather, your home loan will be transferred to another lender and you’ll continue making repayments as you did before.

Outside of a new app and a different letterhead on any mortgage-related communications, you won’t notice much of a difference. Your loan size, term and type (fixed or variable) will all remain the same.

As for your interest rate, this will likely be the same to begin with but will change over time as your new lender’s funding costs either increase or decrease. 

If it turns out your new lender isn’t a good fit for you, you can always refinance to another one. Scan the market to see the kind of rates on offer, and think about which features you’re likely to make use of.

What happens to the money in my offset account?

Fortunately, funds held in your offset account will be protected by a government-backed initiative called the Financial Claims Scheme (FCS) — but only up to a certain amount.

The FCS was introduced in 2008 in response to the global financial crisis. Under the scheme, customers of authorised deposit-taking institutions (ADIs) will be compensated for amounts up to $250,000 held in deposit accounts.

Importantly, the $250,000 limit applies per person, per ADI. That means if you have $400,000 across two banks that operate under the same licence (such as ubank and NAB or Tic:Toc and Bendigo Bank), you’ll only be covered up to $250,000 — nothing above that.

What about the money in my redraw facility?

A redraw facility lets you retrieve any funds you’ve contributed above the minimum amount you’re required to pay each month. While approval will need to be granted by your bank (unlike an offset account), having this option can be reassuring for borrowers.

Since redraw facilities aren’t separate deposit accounts, however, they aren’t covered by the FCS. So if you’ve been making extra repayments and your loan is sold to another institution, the amount held in your redraw facility will simply be deducted from the outstanding loan balance. 

RELATED: Offset account vs redraw facility

For more information, browse our range of home loan guides. And if you’re looking for a loan, visit our home loan comparison page, or browse the selection below.