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Home loan – failure to repay bridging finance on settlement – disabled customer – negative equity – negotiated settlement
Mr and Mrs G live in a small town. Mr G had recently suffered a stroke which resulted in some cognitive impairment, as well as physical disability. Both Mr and Mrs G were receiving a sickness benefit.
In May 2004 Mr and Mrs G sold their house and purchased a new one. Because they wanted to ensure the purchase of their new house before settling the sale of their previous home, they obtained bridging finance of $146,000 from their bank. They already had a loan of $90,000 on their previous property.
It was assumed that, when the sale of Mr and Mrs G’s previous house was finalised, the $90,000 loan would be repaid and the $146,000 bridging loan would be reduced, leaving them with a single secured loan of $98,000 over the new property. Mr and Mrs G expected to have about $6,000 left over from this loan to pay for some minor alterations to their new house.
Unfortunately, the above scenario did not eventuate. When the sale of Mr and Mrs G’s former home was completed the bridging loan was not repaid, and their solicitor deposited all funds from the sale of the property into their current account, including the unpaid bridging loan. Before the bank noticed that the bridging loan made up a large part of this amount of about $235,000, Mr and Mrs G had spent nearly all of it, partly on renovations and improvements to their new home, and partly to repay other debt.
This meant that Mr and Mrs G now owed the bank a total amount of about $235,000 (instead of the originally intended $98,000). This loan was secured against their new property, valued at $194,000. With a net monthly income of approximately $2,300, Mr and Mrs G simply could not afford loan payments of $1,665 per month on the increased loan amount. They consequently referred their complaint to my office. While my investigator was investigating the complaint, the bank offered to accept repayments calculated on an interest only basis, in order to relieve the financial burden on Mr and Mrs G.
It was clear that, through no fault on the part of Mr and Mrs G, an error had been made when the sale of their previous home was finalised, as a consequence of which the bridging loan was not repaid to the bank. Mr and Mrs G assumed that the bank and their solicitor had ensured that all necessary loans, including the bridging finance, would be repaid, and that any funds available in their current account could be spent.
It was generally agreed that Mr and Mrs G would be unable to afford loan payments in excess of $1,600 per month on their limited income. After preparing a budget, they estimated that they would be unable to pay more than about $900 per month in loan payments. For its part, the bank accepted that the enforced sale of Mr and Mrs G’s new home would serve neither its own commercial interest nor the financial and personal interests of Mr and Mrs G, who were both near retirement age. Not only was it likely that the new home would sell for at least $40,000 less than the total amount owed to the bank by Mr and Mrs G, but the latter would lose both their new home and the equity carried over from their previous one. In the absence of any other mentionable assets, they would effectively become homeless.
After a thorough review of Mr and Mrs G’s finances and a lengthy and complex dispute resolution process, my investigator was able to facilitate a meeting between Mr and Mrs G and representatives of the bank. At this meeting the bank made the following offer, acceptable to Mr and Mrs G, in accordance with which it would:
- pay a lump sum of approximately $24,000 into Mr and Mrs G’s loan account in recognition of the error made when the sale of their previous house was finalised. This would reduce to $210,000 the amount owed to the bank. The bank also acknowledged its poor internal processes and the inconvenience and stress which this episode had brought upon Mr and Mrs G;
- re-document the reduced loan of $210,000 at a reduced fixed interest rate of 5.5% per annum for a period of two years. This would reduce Mr and Mrs G’s loan payments to $450 per fortnight – an amount which they could just afford to pay; and
- refund various dishonour fees and credit charges that had accrued to Mr and Mrs G’s account when they began to experience financial difficulties caused by the higher loan payments they had been required to make.
It was agreed that a further review of Mr and Mrs G’s loan would take place two years after this agreement entered into effect, in the context of their financial position at the time. Mr and Mrs G agreed that, when they had paid off a few current hire purchase agreements, they would apply as much as possible of this amount to their loan payments to the bank, thus increasing the speed with which they paid off their debts to the bank. Mr and Mrs G also undertook not to enter into any additional financial commitments which could lessen their capacity to fulfil their financial obligations to the bank.