When you sell a property with a mortgage, you can usually keep whatever money is left after repaying the bank loan (unless, of course, you transfer the loan to another property you’ve bought). Things are less straightforward, however, if the mortgage acts as security over more than one loan. In that situation, banks won’t automatically let you keep the entire balance. That’s a source of complaints, as this guide explains.  

Existing and future lending 

Most mortgages are what’s called an “all obligations” mortgage. This means the mortgage secures all money the property owner may owe the bank, both now and in the future. The result is that it enables the bank to require you to divert the balance on the property you’ve sold towards reducing the amount owed on other loans. 

For example, you have two properties. Property A has a mortgage of $300,000 and property B a mortgage of $600,000. Property A sells for $400,000. You want to repay the $300,000 and keep the $100,000. The bank, however, makes you put the $100,000 sale proceeds towards reducing your loan on property B from $600,000 to $500,000. The reason is that it must be satisfied property B provides sufficient security for its remaining loan. In this example, property B might have had a market value of $700,000, which the bank did not consider high enough in view of the $600,000 it was owed. This would have made the loan-to-value ratio 87.7 per cent, hence the need to reduce debt with the proceeds from property A. 

Other reasons 

A bank may have various reasons for directing that some or all of the proceeds from the sale of one property go towards the loan on another. One, as mentioned, is that the loan-to-value ratio may not be satisfactory on the second loan. Others might be that: 

  • The bank’s lending criteria may have changed since it approved your loans (the loan-to-value ratio requirements being a typical example). 
  • Your financial situation may have changed, affecting your ability to make loan repayments.  
  • Property values may have fallen. 

 Before you sell 

 Talk to your bank first. That way, you’ll be fully informed about how much of your borrowing it wants to be repaid. Bear in mind you may have to pay an early repayment charge if the bank makes you reduce your remaining loan and you have to break a fixed rate loan to do so. See also our Quick Guides: 

  • Early repayment charges  
  • Complaining about a loan decision  
  • Loan-to-value lending restrictions 

Talk to the bank and get fully informed about how much of your borrowing it wants to be repaid before you sell.

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Concerns about lending decisions

We receive complaints about banks both refusing to lend and allowing customers to borrow when the customers say they could never have afforded the repayments.

Lending decisions are usually a matter of commercial judgement for banks, something beyond our powers to investigate. We can, however, investigate administrative errors in the lending application process. This includes complaints about a refusal to lend and also what is sometimes termed "irresponsible lending".

How banks evaluate applications

In considering a lending application, a bank should take into account, among other things, the customer’s income and whether it is secure, what other debt the customer has, and the customer’s credit rating.

Banks rely on getting honest, accurate information. Usually, a customer is required to sign a declaration confirming the information he or she has given in support of an application is accurate. Banks should make further enquiries if the application is incomplete or something in it suggests the information is incorrect. 

Banks must provide credit or increase a customer’s credit limit only when the information they have available leads them to believe the customer will be able to meet the terms of the lending. 

Banks must consider all relevant information available to them from throughout their various departments when making a lending decision. For example:

  • it may not be enough for a bank to consider only credit card department information when other departments also hold information relevant to a loan application
  • the fact a customer has previously met payments on a current credit facility may not in itself establish that the customer can repay a higher level of debt; a bank should check other information it holds on the customer.

Our approach to lending complaints

In order to conclude that a bank lent to a customer who lacked the means to meet loan repayments, we must be satisfied the bank knew, or should have known, the customer could not afford the loan repayments when he or she requested or drew down the loan. This applies to any type of lending, whether secured or unsecured, including mortgages, personal loans, business lending, credit cards and overdrafts.

In order to conclude that a bank acted incorrectly in refusing lending, we must be satisfied an administrative failure occurred in the bank’s assessment of the application.

Factors we weigh up

When considering complaints about lending, we look at:

  • what information the bank asked for and what information it received about the customer’s ability to repay the loan
    whether the bank considered all information available to it
    whether the bank complied with its own policies and procedures on credit assessment
  • whether anything should have prompted the bank to seek more information
  • whether the bank waived a particular policy requirement, and if so, why.

Generally we are unlikely to find in favour of a customer who was subsequently unable to service a loan if the customer:

  • actively sought the loan
  • was not affected by any disability at the time
  • met, or almost met, the bank’s usual lending criteria, and the bank made appropriate enquiries.

We are also unlikely to find in favour of the customer if:

  • the bank asked all the right questions, and they were appropriately worded
  • the customer gave incomplete information about his or her financial position or gave inaccurate responses.

When we uphold lending complaints

Generally, we recommend a bank writes off some or all of the interest and charges associated with a loan if we find it has lent to someone who was unable to meet loan repayments and who benefitted from the loan (for example, by buying a property he or she wants to keep). This is because the customer should not have to bear the total cost of the borrowing.

In most cases, the customer will still be responsible for repaying the borrowed amount, and we will generally encourage the bank and customer to come to a repayment arrangement the customer can afford.

We may suggest a bank writes off a debt if there is no possibility of the customer making any repayments. In such cases, the bank may make an adverse credit listing against the customer to ensure all potential future lenders are aware the customer has previously defaulted on lending.

When we uphold refusal-to-lend complaints

We will ask a bank to reassess an application if we find that it made an administrative mistake in assessing a lending application (for example, by wrongly calculating an applicant’s income). We cannot make a bank approve a lending application because that is a matter of  commercial judgement for the bank, but we do expect banks to follow an appropriate administrative process in assessing applications. 

Loan-to-value ratio restrictions

Banks may decline more low-deposit home loan applications as a result of the Reserve Bank’s loan-to-value ratio restrictions. These require banks to restrict residential mortgage lending exceeding 80 per cent of a property’s value to a maximum of 10 per cent of all new mortgage lending.

For more information, see the Quick Guide on Loan-to-value restrictions. See also the Quick Guide on Guarantees. This has information for those considering guaranteeing someone else’s borrowing. The Reserve Bank website also has information about loan-to-value lending restrictions.

Transferring credit card debts

Transfer process

You must apply for a credit card account at the new bank if you don't have one there already. You will be assessed against the bank’s credit criteria. Check your debt before you apply to ensure it includes purchases or payments since your last statement. Note that interest accrued during the current month may not show up.

If the bank approves your application, it will pay off your card debt debit at your other bank and create a new debt. It will tell you the credit limit it is prepared to give you. The total of all transferred balances must not exceed that limit. You may be able to transfer store card or personal loan balances, but check first with the new bank about any exclusions.

You may have to close your existing credit card account if having two credit cards will exceed your debt servicing ability. Talk to your card provider. It's your responsibility as the customer to close accounts.

Interest rates on transferred balances

Transferred balances may have special low interest rates, but new purchases and cash advances are usually subject to the bank’s normal rates. Check the card’s terms and conditions to see how interest rates apply. Interest rate deals may be for a set time only. Make sure you know when that period ends and what the subsequent interest rate will be.

Allocation of repayments

Generally, your credit card repayments will be allocated to the balance with the lowest interest rate. If you have a transferred balance at a special low interest rate and you put purchases on that card, your repayments will probably be allocated to the transferred balance rather than to the recent purchases. This means any purchases or cash advances you make after the transfer won't be paid off until you have repaid the transferred balance.

Payment allocations are described in the credit card terms and conditions. Talk to your bank if you are unclear how payments will be applied. You need to continue making minimum monthly repayments and should check out potential penalty fees if you fail to make them.

Early repayment charges

Customers who borrow money at a fixed interest rate for a fixed term enjoy the benefit of knowing exactly what their repayments will be over the period of the loan. They are not affected by any rise or fall in interest rates during that time. In return, banks get a pre-determined return on their money.

But if customers repay their loan early (or make a significant lump sum payment before the end of the term), banks may not be able to lend that money to someone else at the same rate. That’s because interest rates may now be lower than when the loan was taken out.

To recoup lost earnings, banks apply an early repayment charge (also known as a break fee). In order to apply an early repayment charge, it must be stated in the terms and conditions of the loan contract – hence the importance of reading a loan contract carefully. The terms and conditions may also allow for an administration fee when a loan is repaid early. This is a flat fee and quite separate from an early repayment charge.

Calculating the charge

The Credit Contracts and Consumer Finance Act 2003 regulates early repayment charges on consumer loans. Consumer loans are loans that have been advanced for personal, domestic or household purposes. 

The Act allows lenders to recover their costs when a borrower repays a loan early. The Act contains a formula for lenders to use when calculating how much they lost, but it is not compulsory to use this formula (known as a “safe harbour” formula). They can use their own, but their formula must result in a reasonable estimate of how much they lost as a result of early repayment. Lenders must tell borrowers whether they are using the safe harbour formula or their own formula, and they must also explain how they will calculate the charge.

Calculating early repayment charges involves a complex formula. Many – but not all – banks base the charge on the difference between the wholesale interest rate on the loan and the wholesale rate applicable when the loan is repaid early (other factors are also included in the calculation). If rates have risen since the loan was taken out, a charge won’t be applied because the bank can lend the money again at a higher rate.

Banks can’t give prospective borrowers an indication of how much it might cost to break a loan early because the calculation requires two inputs that cannot be known in advance: the point at which the borrower will decide to repay the loan early, and the interest rate applicable at that future point in time. Only with that information can banks calculate any loss and any corresponding charge.

There is nothing preventing borrowers from trying to negotiate a lower charge, but banks are under no obligation to agree. Any reduction is entirely at banks’ discretion. Borrowers should assume banks will apply the charge in full.

Problem areas

Customers are frequently surprised at the size of the charge they face during times of falling interest rates. That surprise often leads them to complain to us. But it is important to remember that an early repayment charge is not a problem in itself – provided the loan contract stipulates that the bank can take such a step if the loan is repaid early.  

Complaints we receive include:

  • A bank failed to tell a customer about the charge, either when the customer took out the loan or repaid it early. For example, a bank might have told a customer about an administration fee, but not about the early repayment charge. Or a bank might have failed to tell a customer about the charge when the customer said he or she might repay the loan early. 
  • A bank failed to tell a customer about how it would calculate the charge, or didn’t explain the calculation properly. Bank staff might not, for example, have been able to explain how the charge was calculated, and did not refer the query to someone who could. 
  • A bank made a mistake in the way it calculated the charge. We will check whether the bank calculated the charge according to the contract. We may also refer complaints about methodology to the Commerce Commission, which enforces the Credit Contracts and Consumer Finance Act 2003 and has greater powers to take action against lenders that have breached it. 
  • A bank gave incorrect advice about the type of loan most appropriate to a customer’s circumstances. A customer might, for example, have told a bank of his or her intention to sell a property within a specific time, and the bank recommended a fixed-rate loan whose term extended beyond the point when the customer was intending to sell.
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