Home loans are commonly referred to as mortgages, but a mortgage is actually a charge over a property. When a bank lends money, it requires security against a borrower’s failure to repay the money. The borrower grants the bank a mortgage over his or her property. If the borrower repays the debt secured by the mortgage, the mortgage is discharged. If not, the bank can sell the property to recover the money it is owed. This is called a mortgagee sale. 

Speak to the bank sooner rather than later

Contact the bank immediately if you’re struggling financially. Explain your circumstances and seek the bank’s suggestions or help. The earlier you make contact, the more ability it will have to offer possible help. A budget adviser is another source of help, as is our Quick Guide Financial hardship. Also try:

Missed payments

Your bank is likely to contact you if you begin to miss payments. Banks will usually try to work with customers if they miss one or two payments rather than taking debt recovery or mortgagee sale action. Be honest and open with your bank about your situation. Your bank is likely to ask you to complete a statement of position. It is in your interests to do so. This statement details your income and expenses and gives the bank an indication of whether you can afford to enter into a repayment programme. Budget advisers can help you with this, and may talk to your bank on your behalf. 

If you and your bank are able to come to an arrangement to meet your missed payments, do your best to keep to the arrangement. It is reasonable for your bank to expect you to pay the arrears if you have the funds to do so, and it will also expect you to continue making repayments.

When a bank issues a letter of demand

A bank will issue a letter of demand if you can’t come to an agreement about missed loan payments or if you continue to miss payments. This marks the first step in the formal debt recovery process. A letter of demand will state the amount of missed payments you owe and demand payment by a certain date. 

Once again, talk to your bank. If you can pay the amount by the due date, confirm this with your bank. If you can’t, tell your bank as soon as possible and let it know what amount you can pay. You might still come to a repayment arrangement that is acceptable to the bank at this point. 

If you can’t pay the full amount and you can’t reach an agreement with the bank, seek independent advice. A budget adviser or lawyer can discuss options such as refinancing with another bank, or selling your house yourself – before a sale is forced on you. 

Notice under the Property Law Act 2007

If you don’t repay the amount the bank demands, it can issue a notice under the Property Law Act 2007. This notice is likely to be served on you in person. Don’t try to avoid such a step by making yourself scarce as it will add to your debt. Further, the bank can apply to the courts to serve the notice in another way, such as by taking out a public notice in a newspaper. 

A notice issued under the Act sets out the details of the default and states the amount you must pay by a certain date. This will be at least 20 working days after the serving of the notice. 

At this point, you can still talk to the bank about a possible repayment arrangement if you can’t pay the full amount by the due date. However, the bank does not have to agree to your request. 

Failure to pay by the due date

If you don’t pay the amount demanded in the notice by the due date, the bank has the right to sell the property to recover all money secured by the mortgage, which is generally all of your debts to the bank. 

Note that you may incur an early repayment charge if the mortgagee sale means that your fixed-rate loan is repaid early. See our Quick Guide Early repayment charges.

Selling the property

Co-operate fully with the bank and its lawyer, valuer and real estate agent during the sale process. You remain personally liable for any shortfall after the sale of the property, so it is in your interest that the property is accurately assessed and properly marketed for sale. Denying access to a property during the marketing and sales process is likely to affect the sale price. 

The bank is obliged to take reasonable care to get the best price reasonably obtainable at the time of sale. We will usually conclude that a bank has met this obligation if it:

  • obtained a registered valuation of the property (which usually gives an indication of an expected sale price from a forced sale as well as its market value)
  • appointed a real estate agent to market the property for a period of (usually) four weeks
  • properly considered any offers made.  

Sometimes people complain to us that a bank relied on an inaccurate valuation and sold the house for less than it was worth. We are likely to conclude it was reasonable for the bank to rely on a valuation from a registered valuer. However, we may take a different view if the bank was aware of a significant factor affecting the reliability of the valuation. (Complaints about registered valuers can also be taken to the Valuers Registration Board.)

The bank does not have to wait for the best time to sell the property or improve the property before mortgagee sale. A mortgagee sale for a price less than the current market value usually does not in itself establish a breach of the bank’s obligation.

Sometimes people complain the bank’s real estate agent was incompetent and marketed the property poorly. If the real estate agent followed a reasonable marketing plan, the property was appropriately advertised and was reasonably available to potential purchasers to view, we are likely to find that the sales process was fair. Agents are able to advertise a property as a mortgagee sale. Complaints about real estate agents can also be made to the Real Estate Agents Authority.

Outstanding debts

Sometimes people ask if they can give the bank the keys to their house and walk away from their debts. The answer is no. They remain liable for the debt to the bank, as well as all costs associated with the property (such as rates, insurance and maintenance) until the property is sold and settlement has taken place. If the sale price is not enough to repay the entire bank debt, they are liable for the outstanding balance. If no agreement can be reached with the bank about repaying the balance, the bank can take recovery action that can ultimately result in their bankruptcy. 

The earlier you make contact with the bank, the more likely it will be able to offer help.

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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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