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A GOOD number of Standard Chartered Bank home loan clients got a rude shock in the mail last month, when a letter arrived telling them of a change in the terms of their MortgageOne loan scheme.

The change means that clients will end up with higher interest costs for their home loans - on top of what may well be the highest loan rate in the market. Some Stanchart clients are charged 5.6 per cent for their home loans at a time when the three-month interbank rate is hovering at about 3.5 per cent.

Stanchart maintains that the change is beneficial for clients, but that view is lost on a number of enraged customers who have quite simply lost faith. So, what gives?

The MortgageOne debacle makes an interesting case study of how not to drop a bombshell. But for the protagonists - Stanchart itself and the clients - there is a lot more at stake than a public relations gaffe.

The bank, for one, risks losing a highly valued customer segment of 'premiere' or 'priority' customers who hold well over $200,000 in their deposit accounts. Some clients who got in touch with The Business Times have begun the process of closing all accounts. Such clients, whose loans are believed to be modest relative to their cash balances, should count themselves lucky. A sorrier plight is visited on those of more modest means who took on large loans. They now grapple with high interest costs or high exit costs if they redeem their loans.

MortgageOne is a scheme where a client's loan account is linked to his or her cash account. The interest rate on the deposit can be used to offset the rate on the home loan. A number of banks, including Citibank and HSBC have broadly similar schemes. Until recently, MortgageOne offered a one-on-one offset between the deposit and loan interest rates. There is a cap set on the deposit where funds in excess of the loan principal will earn nothing. Still, it was an attractive proposition for those who keep large cash balances. Effectively, if you keep a cash balance equal to your loan, all the instalments go directly towards servicing the principal. Your effective interest cost is zero. HSBC offers similar terms in its SmartMortgage scheme, and Citibank is offering those terms on a promotional basis.

The bombshell that Stanchart dropped was that it will reduce the proportion of a client's deposit that qualifies for the home loan rate to just two-thirds. The remaining one-third of the deposit will earn 0.5 per cent, which will be counted towards the loan offset.

Numbers trotted out by Stanchart look attractive at first glance. Assuming a deposit of $500,000 and a $500,000 loan, the new terms still result in a shorter repayment period than the original terms. That is because the interest earned on one-third of the deposits will now play a role in reducing the loan principal.

The new terms, however, mean that the net interest cost will rise for many clients unless they top up their deposits. One client with a $600,000 loan backed by a $600,000 deposit estimates that his net interest payable will rise by nearly $10,000. Stanchart claims the change was effected due to feedback from clients who want any excess cash above the loan to be put to work in reducing the loan as well. But clients say excess cash is not kept in the account. Instead, it is moved to higher yielding cash accounts such as the bank's own e-Saver scheme which pays up to 2.45 per cent for amounts over $50,000.

Clients, after all, are increasingly sophisticated, and eagle-eyed when it comes to good deals. Earning 0.5 per cent against a loan cost of 5.6 per cent is piffling, and gives the bank too much of a margin. It's obviously much more cost effective to narrow the gap between what is earned in cash accounts against the loan cost.

A number of customers have, in fact, only recently reached the stage where their deposits equal their outstanding loans. They were looking forward to an effective net interest cost of zero. Now that rug is pulled out from under them.

Is this an impasse too difficult to bridge?

The truth is that all banks reserve the right to change anything in their contracts, and the terms are always stacked against the customer. In fact, in any bank dealings, it should always be highlighted in large print that all bets could be off. That is, not only can your rates change, but all other terms as well. Stanchart's standard contract says the bank has the 'sole discretion to amend, modify and supplement' the loan conditions.

But there should be room for dialogue and negotiation - perhaps a waiver of exit penalties and legal fees. The bank has hit customers where it hurts the most - in their personal finances. The stakes are high in the competitive consumer-finance arena. Playing Goliath is not a winning strategy.