Bank properly assessed loan application to 66-year-old investor

Categories:

Advice & information, Investment, Lending,

Summary:

In 2018, Florence withdrew funds from an investment company to put towards the purchase of a property. She used a home loan to make up the difference. In 2021, aged 66 and looking to retire, she met an investment adviser linked to her work, who explained how she could borrow money from the bank and invest it. The record of the meeting said she was fit and well and expected to work until her late 70s. It also said Florence had received advice about some of the benefits of borrowing to invest.

Published:

September 2024

A broker submitted an application to the bank on Florence's behalf seeking a 15-year loan of $400,000 to repay about $220,000 owing on her home loan and credit cards and to put the balance with an investment company. The bank approved the application, subject to conditions, including that Florence obtain independent investment advice, and that she provide a mortgage over her property as security for the lending. Florence then combined the balance of her lending with her own savings and invested about $460,000 in the investment company. However, in late 2022, Florence became concerned about her investment, which had suffered losses and was not performing as she had expected. The fact the adviser was linked to her work had resulted in tensions in her workplace leading her to quit her job. When the bank learned she had left her job, it gave her a repayment holiday while she withdrew from her investment and repaid most of her lending. Florence complained to the bank that it should not have lent her money for investment purposes, given her age and the risky nature of borrowing to invest. She asked the bank to compensate her for the $140,000 she lost on her investment. The bank did not agree with Florence, and she asked us to investigate.

Our investigation

Borrowing to invest is a high-risk strategy, but the bank was under no obligation to warn Florence of the risks of this strategy or to protect her from the consequences of her decisions. The bank had made a condition of the loan that she seek independent investment advice, but this did not create any obligation to scrutinise the advice she received. The loan application documents showed the bank had properly assessed her ability to afford the loan. She would have been 81 at the end of the 15-year term, but this did not mean the loan was unaffordable. Banks generally consider customers’ ability to repay lending if their circumstances change, such as selling an investment property at retirement. In Florence’s case, the bank noted that she would be able to withdraw her money from the investment company at any time to repay her home loan.