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Mortgage adviser did not confirm client’s instructions

In mid-2020, Martin engaged a mortgage adviser to arrange finance of $1,250,000 so he could purchase his former wife’s share of their property and complete their relationship property settlement. This would involve refinancing existing lending,

The adviser arranged finance with a lender:  a term loan of $1,150,000 and an overdraft facility of $100,000. The interest rate on the term loan was fixed for two years, and payments were to be made on an interest-only basis for two years. 

Martin’s lawyer emailed him saying the adviser had also arranged for a cash contribution of $7,000 from the lender provided that he stay with the lender for three years. Martin signed and returned the cash contribution agreement to his lawyer to pass onto the lender.

In mid-2022, shortly before the expiry of the two-year fixed interest and the interest-only periods, Martin asked his lender for an extension to the interest-only period. The lender was not prepared to give an extension.

Martin then asked his adviser for assistance. At this time, Martin’s plan was to retain the property for three to five years and do some renovations on it. The interest-only term would assist his cashflow so he could finish the renovations. The adviser contacted Martin’s lender, who said they would need to do a full assessment before deciding on further interest-only terms.

The adviser told Martin the lender’s response, and also suggested checking out what another lender might offer. The adviser asked Martin for a copy of the cash contribution agreement he had signed in 2020. The adviser said that if the time had expired, he may be able to get a larger cash contribution arrangement with another lender. Martin was not able to locate a copy of the cash contribution agreement.

On expiry of the fixed interest period, Martin’s term loan went on to the lender’s floating rate.

In early July 2022, the adviser sent loan applications to Martin’s current lender and another lender seeking an interest-only loan for two years.

Both lenders declined: Martin’s current lender remined unwilling to provide further interest-only terms, and the other had concerns about his ability to service the lending.

The adviser asked Martin whether he wanted to try another lender, and Martin agreed.

In early August 2022, the adviser applied to another lender for a loan of $1,330,000. The purpose of the loan was to refinance Martin’s lending with his current bank as well as a car loan he had with another lender. The adviser told the lender that Martin wanted a loan with two years interest-only payment terms. He also advised that Martin intended to sell the property within five years. 

The lender made an offer of finance, subject to nine conditions. Over the next two weeks, the adviser assisted Martin with providing information to the lender to meet its terms.

Martin expressed some frustration to the adviser about the time and effort involved with the application. However, he decided to continue with the process. At this point, Martin and the adviser discussed obtaining lending for a six-month term instead of two years.

At the end of August 2022, the lender made another offer to refinance Martin’s lending. They also approved a $13,000 cash contribution provided he stay with them for three years. The adviser forwarded the lender’s offer to Martin. He asked Martin how he would like the lending to be structured, and set out the following options:

Structure 1

  • $100,000 overdraft (interest only, no principal payments required)
  • $1,230,000 term loan, fixed for 6 months – principal and interest payments. 

Structure 2

  • $1,330,000 fixed for 6 months – principal and interest payments. 

Martin asked for lending to be under “the one fixed loan”. The adviser confirmed that the loan would be under structure 2.

The lender sent the loan, mortgage and cashback documents to Martin’s lawyer. Martin spoke with his lawyer by phone because he was overseas at the time. He signed the contracts, and they were forwarded to the lender.

Shortly after the loan was drawn down, Martin contacted the adviser to complain that:

  • His original lender had clawed back the $7,000 cash contribution, and he had not been told that would occur. 
  • The new loan was not on interest-only payment terms. 

The adviser contacted both Martin’s original lender and new lender to see if the concerns could be resolved, noting there appeared to have been a misunderstanding about Martin’s requirements. However, the original lender was not prepared to refund the cash contribution because Martin had not stayed with them for three years. The new lender was not prepared to offer interest-only terms. 

Martin said he would not have refinanced at all if knew the two-year cash contribution period with his original lender had not expired, and that the term loan was not on interest-only terms. He believed the adviser had caused him a loss of $10,000, made up of legal costs and interest losses. Martin said he would not get a benefit from the cash contribution with his new lender because he planned to sell the property within two years, and so would have to repay the $13,000.

Martin and the adviser were not able to resolve the complaint, and Martin complained to FSCL.

Dispute

Cash contribution

Martin said that when the discussion moved to refinancing with another lender, the adviser should have worked out all the financial impacts of changing lenders. He also said his lawyer did not explain the repayment schedule on discharging the mortgage held by his original lender, so Martin was not aware the $7,000 would be clawed back. 

The adviser said he was not given a copy of Martin’s cash contribution agreement with his original lender in 2020. Further, the three-year term of the cash contribution was set out in the lawyer’s email to Martin, as well as in the cash contribution agreement he signed. The adviser also noted that Martin’s lawyer should have explained the effect of the cash contribution when discussing the repayment schedule on the discharge of the original lender’s mortgage. Martin had the option of declining to go ahead with the refinance at that stage. 

The adviser said he contacted the original lender at the time and asked about the costs to Martin of refinancing with another lender, and was told there were no costs. 

Interest only

Martin said he wanted interest-only payment terms on his lending, and that he did not change this request, even when the discussions moved from a two-year period to a six-month period. He accepted he had some responsibility for ending up with a principal and interest loan because he did not check the details of the adviser’s email advising of the lender’s approval, and did not carefully review the new loan agreement before signing it. However, Martin felt he should have been able to trust the adviser to carry out his instructions or to tell him if the lenders were not able to meet his requirements.

The adviser believed that he adequately confirmed Martin’s instructions, but accepted he could have made more of an effort to clarify Martin’s instructions and more clearly present options to him. However, he did not consider he was liable for Martin’s failure to carefully read his email or the loan agreement.

The adviser made an offer of $2,000 to resolve Martin’s complaint. 

Review

Cash contribution

We were satisfied that the adviser was not aware of the terms of Martin’s original cash contribution agreement. However, we said he should have clarified the terms before attempting to arrange the refinancing. While the adviser contacted Martin’s original lender, his phrasing of the question led the lender to believe he was asking about the costs of breaking a fixed interest rate loan. As Martin’s loan was on floating interest rate at the time, there were no break costs. The adviser’s question was not sufficiently well-worded to elicit information about the cash contribution. We noted that part of the adviser’s role is to give clients information about the costs to refinance, which can include break costs and cash contributions. This is to ensure clients have sufficient information to make informed financial decisions. 

However we did not consider the adviser was entirely responsible for the clawback of the $7,000 cash contribution. If the lawyer had failed to explain the repayment schedule on the discharge of the original lender’s mortgage, the adviser was not responsible for this.

Interest-only

Given there was a change to Martin’s requirements, refinancing for a six-month period rather than the two years initially discussed, we considered the adviser should have made a file note of the relevant conversation. We also agreed with the adviser that he should have clarified and confirmed Martin’s requirements to avoid any possibility of a misunderstanding.

However, we did not think the adviser was solely responsible for Martin entering into a principal and interest contract. Martin did not carefully read the adviser’s email setting out the loan structure options, or the loan agreement with the new lender. A borrower should take care to read such important documents.

Taking into account all the factors, we considered that the adviser had made a reasonable offer to settle the complaint. 

Resolution

Martin did not agree with our preliminary decision, and asked us to review the case. We did so, however remained of the view the adviser’s offer was reasonable. Martin then accepted the  offer, and we closed our file.

Insights

For participants

Mortgage advisers should ensure that clients are made aware of all the costs of refinancing with another lender so they can make an informed decision. They should not assume the client can recall all the terms of a cash contribution agreement reached with a previous lender, given that these agreements are likely to have been made some years earlier. 

For consumers

Consumers should ensure they read emails from their adviser and their loan contracts. Genuine misunderstandings can occur, and it is important that consumers understand the terms on which the lenders are offering finance. It is unlikely that changes can be made after the consumer has committed themself by signing a loan contract.