In 2020 when Lui and Fiafia bought a house a mortgage adviser helped arrange the finance. In 2022 Lui and Fiafia were expecting their first baby and needed a bigger house. This time another mortgage adviser helped them with the finance.
The transaction went smoothly until, shortly after Lui and Fiafia moved into their new home, the original mortgage adviser called to say that, because the loan had been repaid early, there would be a fee. Lui and Fiafia were aware of the early repayment fee they had already paid the bank and believed this was what the mortgage adviser was referring to.
When Lui and Fiafia received an invoice for $3,500 from the mortgage adviser they were shocked. Their baby had been born six weeks early and was in the neo-natal unit at the hospital. Fiafia had also had to start her parental leave earlier than expected, reducing their income. Lui and Fiafia contacted the mortgage adviser to say they did not know he would charge them a fee for repaying the loan early. Lui and Fiafia had not budgeted for this large expense and could not afford to pay it.
The mortgage adviser sent Lui and Fiafia a copy of his terms of engagement which stated:
“If you repay your loan either in part or in full before 27 months of drawdown date, part or the full amount of brokerage is clawed back by the bank or lending institution. In such cases, the actual clawed back amount will be paid by the client in full, if you don’t give us a chance to arrange your finance from another bank or lending institution.”
Lui and Fiafia replied that they still understood this to refer to the early repayment fee charged by the bank and complained to FSCL.
Dispute
Lui and Fiafia said they had budgeted for the early repayment fee they would have to pay the bank because they broke the original term of the loan early. However, no one, not the original mortgage adviser nor the new mortgage adviser, had said that if they repaid the loan early they would also have to pay the mortgage adviser a clawback fee. Lui said:
“To be sprung with such an unexpected and extravagant fee is unjust and unfair and it is clearly something we cannot afford to pay as we are down to one income now due to my wife being on maternity leave. Such a substantial fee should be explained to customers first and foremost when we request your services. It appears to be a hidden fee that was not mentioned at all during any of our previous conversations because you know very well that we would not have signed up to use your services if we had understood this clause and the fee involved.“
We referred the complaint to the mortgage adviser’s internal complaints process. The mortgage adviser called Lui and explained he had checked his contract with his lawyer and was satisfied that he was entitled to charge the fee. However, to resolve the complaint, the mortgage adviser offered to reduce the invoice by half.
Lui and Fiafia did not accept the mortgage adviser’s offer.
Review
We wrote to the mortgage adviser and advised that we had started our investigation into Lui and Fiafia’s complaint. The mortgage adviser replied immediately that he had changed his mind and would waive Lui and Fiafia’s invoice entirely. Lui and Fiafia responded:
“We are really pleased with this outcome, but it is still very concerning that most mortgage brokers fail to mention what clawback is when signing up with them. We have had dealings with a few mortgage brokers over the years and not even one of them had mentioned or explained this clause to us. Even our current mortgage broker failed to mention this clause to us and only mentioned it when we asked her recently. This being such a substantial amount, should be upmost priority for all mortgage brokers to ensure that the clients understand the clause well.“
Resolution
Lui and Fiafia accepted the mortgage adviser’s settlement offer, and we closed our file.
Insights for consumers and participants
When a mortgage adviser arranges finance for a borrower, their service is free to the borrower because the mortgage adviser is being paid by the bank. If the borrower repays the loan early the bank will recover, or ‘clawback’, some of the money the bank paid to the mortgage adviser, effectively depriving the mortgage adviser of some of their income. The mortgage adviser will then invoice the borrower to recover the money that they have lost.
Although the clawback fee is likely to be mentioned in the mortgage adviser’s contract with the borrower, many borrowers are completely unaware that the mortgage adviser might charge them a fee if the loan is repaid early and are shocked at the amount of the fee, often a few thousand dollars.
As well as clearly disclosing the fee in the documentation, we encourage mortgage advisers to discuss the potential for a clawback fee with the borrower when arranging the finance. The adviser should explain when a fee may be charged, the approximate amount of the fee and how the fee has been calculated. The adviser should always keep a record of their discussion with the borrower.
