Bank wrongly cancelled offset loan contracts

Categories:

Advice & information, Instructions not followed, Bank decisions, Lending,

Summary:

In 2021, Albert and Lydia formed a partnership and asked the bank for money so it could buy a property. The bank offered the partnership offset loans so they could reduce their interest by linking their loans to money held in their savings account from the sale of another property.

They accepted the bank's offer and signed offset loan contracts. On settlement day, however, the bank discovered it had made an error and that it could not offer offset loans to a partnership due to an Inland Revenue Department (IRD) ruling. It cancelled the offset loan contracts but didn’t tell Albert and Lydia until several days later, when it emailed them standard loan contracts to sign. In the meantime, the settlement went ahead as planned.

Published:

July 2026

When Albert and Lydia received the email, they thought it might have been a scam and called the bank. It said it had cancelled the contracts because it could not offer offset loans to partnerships, and the staff who had arranged the loans were unaware of this fact. Albert and Lydia expressed disappointment at not having offset loans but signed the replacement contracts.

In late 2025, they complained that the bank had wrongly cancelled the offset loan contracts, that it had failed to tell them at the time what it had done, and that it had failed to clearly explain the consequences of borrowing money through a partnership. They said these failings had caused them a financial loss and stress and had also prevented them from selling another property.

Our investigation

The evidence showed the bank had entered into binding contracts to provide offset loans. We found the bank had no right to cancel the contracts and had acted wrongly. The bank accepted it had no contractual right to cancel those contracts and had done so because it was not allowed to provide offset loans to partnerships due to the IRD ruling.

We also found that the bank handled the situation poorly. It should have contacted Albert and Lydia about the issue on settlement day and given them time to consult their solicitor and consider their options. Instead, it emailed them replacement contracts without explanation several days later. When they expressed disappointment at this, the bank did not acknowledge or apologise for the impact of this sudden change.

However, we did not agree that the bank was responsible for any consequences stemming from the lending being in the name of their partnership rather than their personal names. They decided to use the partnership for the lending on their accountant’s advice before they approached the bank. The bank had no obligation to advise them about this.

We also could find no evidence that the bank was responsible for them not selling another property.

We considered the impact of the bank’s wrongful cancellation of the offset loans. If the offset loans had been provided, Albert and Lydia would have been able to reduce the interest charged on their lending by offsetting their credit balance in another account. The bank provided calculations showing that they paid $2,500 more in interest on their lending as a result of the bank cancelling the offset loan contracts. This was a direct loss caused by the bank’s actions. The calculations took into account the fact that, within nine months of entering into the loan contracts, Albert and Lydia had spent most of the money that was supposed to be available for offsetting.

The bank also acknowledged that its actions, including its very poor handling of the matter, had disrupted Albert and Lydia’s financial planning and caused them stress and inconvenience. The bank offered them $2,500 for the direct loss and $6,000 for the stress and inconvenience it had caused them. We considered this offer fair and recommended they accept it.