better banking

Case - 50262

2016 - 2017

Lending

Property lending

Mr T and his partner lived in Australia and owned three properties in New Zealand, two of them apartments they rented and the third a piece of bare land.

Mr T contacted their bank to say they were thinking of selling one apartment because of the body corporate fees. He asked the bank whether any profit had to be used to repay their home loans, or whether they could use the profit for their own purposes. The bank said they could keep any profit “as long as the bank is comfortable with the remaining security held and you can service the remaining debt comfortably”.

Several weeks later, the apartment went on the market and Mr T advised the bank of that fact. The property sold a month later and their lawyer contacted the bank to request a discharge of the mortgage. Their lawyer said they wanted to repay a $340,000 loan and keep the balance of $220,000. This would result in a loan-to-value ratio of 93 per cent, a figure outside the bank’s usual lending criteria for investment properties and bare land.

The bank called Mr T to say he and his partner would need to repay more than $340,000. Mr T said he was leaving his job to start a new business and needed the $220,000 for that purpose. The bank said it would consider a request to reduce the loan-to-value ratio to 80 per cent, which would leave them with $150,000.  

The bank subsequently said it needed all the sale proceeds because it was concerned Mr T and his partner would otherwise not have sufficient income to service the remaining debt. It noted the loss of rent from the sold apartment and the fact Mr T would be leaving his job. Mr T then told the bank he would stay in his job. The bank then said it was prepared to reduce the loan-to-value ratio of 60 per cent. This would allow them to keep $50,000. After more discussions, the bank raised the amount to $80,000. Mr T and his partner agreed to this so the mortgage could be discharged.

However, they then complained to us that the bank had led them to believe they could keep all of the sale proceeds, and that they had lost the opportunity to pursue a profitable business venture.

We found the bank had not said or done anything to lead them to believe that they could keep all of the proceeds. The bank had warned they could keep any profits only if it was satisfied with both the remaining security and their ability to service the remaining debt. Mr T and his partner believed they could service the remaining debt, but that was not the point. It was for the bank to make such an assessment. We noted that keeping all of the proceeds would have pushed the loan-to-value ratio to 93 per cent, which was well outside an acceptable ratio.

We also noted the importance of full and frank disclosure to the bank when considering the sale of one of several properties secured by more than one loan. This can prevent misunderstandings about how much of the sale proceeds a customer can keep.

We recommended they accept the bank’s compensation offer of $6,300 for stress and inadequate communication. Mr T and his partner accepted the offer.