In 2020 Chen approached a financial adviser to help him refinance his lending from his existing bank. Chen’s bank was about a month away from the bank mortgagee selling Chen’s home.
Chen’s financial adviser negotiated a loan with a non-bank lender. The lender agreed to a one-year term, capitalising the interest into the loan balance, on the understanding that Chen would use the year to tidy up the property for sale. Chen did not need to make any loan repayments during the year and would pay a lump sum of $320,000 at the end of the one-year term. The property was valued at $440,000.
After a year Chen had not sold the house and could not repay the loan. Over the following year the lender refinanced the loan every two months, sometimes capitalising the interest and sometimes requiring payments of between $125 and $500 a week. Chen made some payments but was often unable to afford the agreed payments, and Chen’s loan balance continued to grow.
After another year, the lender said they could no longer roll over the loan and if Chen could not refinance or sell the house, they were considering a mortgagee sale. Chen complained to us saying that he was experiencing financial hardship and that the lender was refusing to help.
Dispute
Chen said that he wanted to keep his house and that he was hopeful of getting a new job that would allow him to repay the loan. Chen felt the lender could do more to help him and wanted the lender to refinance the loan on a long-term basis.
The lender said the loan was only ever offered on a short-term basis on the understanding that Chen would renovate and sell the property. The lender considered Chen’s application to refinance the loan over a longer period but said he did not meet their lending criteria. The lender could see that Chen had experienced financial difficulty over the last few years but could not continue to roll over the debt. Chen’s debt was increasing, and the lender was concerned that the house sale proceeds would not be enough to repay his debt.
Review
We looked first at the original decision to lend. Under the Credit Contracts and Consumer Finance Act 2003 the lender is obliged to make sure that a borrower can afford to repay a debt without suffering substantial financial hardship. Because the original loan was to be repaid in one lump sum after one year, and there were no regular loan repayments, we did not have to look at an affordability assessment. The lender had a valuation on file showing that the property was worth $440,000. If Chen had renovated and sold the house within the original loan term of one year, he would have been able to repay the loan of $320,000 without suffering substantial financial hardship.
We then looked at the lender’s actions when Chen said he was experiencing financial hardship. We could see that the lender had rolled over the loan allowing Chen more time to sell the property. However, as the debt was increasing it would have been irresponsible of the lender to allow this to continue indefinitely. The equity in Chen’s home was diminishing over time.
Resolution
We spoke to Chen and explained our view that the lender did not appear to have done anything wrong. Chen accepted our explanation and agreed to discontinue his complaint.
Insights for consumers
No one wants to lose their home in a mortgagee sale. However, if you are unable to repay your loan and a lender gives you time to sell, this may be your best option. If you delay selling and you are not making regular loan payments your financial situation is likely to deteriorate leaving your lender with the only option of stepping in as mortgagee and selling your property.
