She left the meeting believing that a sale price of $200,000 would leave her with $40,000 after repaying the loan on the rental and reducing the loan on her family home. The $40,000 would pay off her other debts, so she had the property painted and put it on the market.

It sold for $200,000. However, she received nothing at settlement because the bank used all of the balance after clearing the rental loan to reduce the loan on the family home. It said this was necessary to get the loan-to-value ratio below 80 per cent.

The bank agreed to release $10,000 to pay the house painter, but Sarah was also behind in her payments to non-bank creditors. Sarah said she would have kept the property tenanted if she had known she would get nothing from the sale.

Our investigation

A note made by the bank officer of his meeting with Sarah recorded that, if she sold the rental, the bank would need to reduce the loan-to-value ratio on the remaining loan to at least 80 per cent. This was correct, but we were concerned Sarah left the meeting with a genuine and fundamental misunderstanding of her position.

At the time of the meeting, the loan-to-value ratio on her two loans was 115 per cent. Selling the rental property for $200,000 would inevitably require the bank to keep all of the sale proceeds to lower the loan-to-value ratio on her family home. It should have been obvious to the bank that even the most favourable price would still leave Sarah with nothing. The bank should have made this clear to Sarah to avoid any misunderstanding and to enable her to make an informed decision about whether to sell.

Outcome

The bank agreed with our view and offered Sarah $4,000 for inconvenience, which she accepted.