Lincoln borrowed $420,000 in June 2018 to purchase a house, which was secured by a mortgage over the property. The loan was an interest only facility scheduled to expire after a year. This meant that Lincoln only had to pay interest on the loan for a year, and had to repay the balance of $420,000 sometime before June 2019 by refinancing with a new lender.
Over the course of the next year, Lincoln made all his monthly repayments without any issues.
In May 2019, the lender reminded Lincoln that the loan was expiring in June and he needed to find a new lender to refinance the loan. Lincoln was dealing with a serious personal issue at the time, so the lender agreed to extend the loan until November 2019 to give Lincoln more time to arrange the refinance.
Over the next year, Lincoln kept delaying the refinance. The lender started charging default interest on the unpaid balance, and in October 2020, finally started the process for a mortgagee sale of the property. This prompted Lincoln to complain to FSCL.
Dispute
Lincoln said he had genuinely been trying to arrange the refinance, and he felt it was unfair that the lender had charged $40,000 of default interest and taken the property to a mortgagee sale. Lincoln said he didn’t realise default interest was being charged on the loan and, if he had known, he would have found a way to manage the payments. Lincoln also couldn’t understand how the loan balance had ballooned to $510,000.
The lender said they had been trying to work with Lincoln since June 2019 to sort out the refinance, but every time Lincoln promised it was almost finalised, there would be another delay. The lender said they had not seen any evidence of the loan being close to a refinance, and the situation had reached a point where they couldn’t give Lincoln any more chances.
The lender said they warned Lincoln multiple times about default interest being charged if the loan was not settled on time. As a gesture of goodwill, the lender offered to reverse $9,000 of the default interest, but Lincoln did not accept.
Review
We reviewed Lincoln’s loan documents, repayment history, and the correspondence between him and the lender.
We listened to the telephone conversation where the lender initially agreed to extend the loan to November 2019. We agreed with Lincoln that the lender was unclear about when default interest would start being charged so, on this basis, we thought it was reasonable for Lincoln to expect no default interest to be charged before November 2019. The default interest charged before November 2019 was about $17,000.
As for the rest of the loan balance, we found that Lincoln had missed 10 of his monthly interest-only repayments since June 2019. In addition, standard interest had been accruing on the unpaid balance, along with another $23,000 of default interest. This was how the balance had increased to $510,000.
Lincoln understood that he had to take responsibility for the missed repayments. With respect to the default interest, Lincoln said he would consider meeting ‘somewhere in the middle’ with the lender, because he also understood they were entitled to charge some default interest given Lincoln hadn’t repaid the loan on time.
Resolution
We asked the lender if they would write off 50% of the default interest, amounting to $20,000, in settlement of Lincoln’s complaint. This included the $17,000 of default interest that shouldn’t have been charged prior to November 2019. The lender agreed to this on the basis that Lincoln had one more chance to arrange his refinance and, if he failed to do so again, they would revert to the original loan balance of $510,000.
Unfortunately, on the day of Lincoln’s refinance, his lawyer made an error and the settlement/refinance couldn’t proceed. This meant the lender was entitled to reverse the loan balance back to the original balance.
Lincoln stopped responding to our queries about whether we could assist with his complaint further. The lender told us Lincoln’s lawyer was arranging for the debt to be assigned to Lincoln’s new lender. Eventually the lender confirmed the loan had been settled, and we closed the complaint.
Insights for consumers
It’s best to confront problems with your loan head-on with your lender as early as possible, and be as transparent as possible with the lender. In this case, Lincoln stopped making his interest-only repayments without talking to the lender, and only gave the lender limited information about his prospects of refinancing. The lender was keen to help Lincoln from the beginning, but after a year of uncertainty, was left with little choice but to commence the mortgagee sale process and charge default interest on the loan.
