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‘When is the end not the end?’

Sustainable build needs sustainable funds

In August 2015 Liam contacted a finance broker. Liam needed to raise capital for his small business to construct a prototype smart dwelling.

Liam’s finance broker tried to find finance at a registered bank or finance company but could not secure a finance arrangement for Liam’s company. Liam’s broker decided to contact a contributory mortgage broker.

A contributory mortgage broker manages interests in a contributory mortgage. A contributory mortgage is where a number of investors’ contributions have been amalgamated into a larger sum, which is then advanced to a borrower, in this case, Liam’s company.

The contributory mortgage broker offered Liam’s company a loan of $355,000 with an annual interest rate of 7.95% and a default interest rate of 19.95% (the loan). Liam’s company was to repay to the contributory mortgage broker a total of $383,222.56 payable in 12 monthly instalments of $2,531.88 and a final repayment of the loan principal of $355,000.

In September 2015 Liam accepted the loan terms and signed a loan agreement (the agreement) with the contributory mortgage broker. The contributory mortgage broker charged Liam $2,973.20 in legal fees and a $6,212.50 establishment fee. Liam’s finance broker was also paid $7,100 fee and Liam’s company was paid the balance of $338,714.30.

Liam met all his interest repayments but, in September 2016, Liam did not repay the loan principal when it fell due.

Liam’s broker worked with Liam to secure new finance with a finance company. In November 2016 Liam’s broker asked the contributory mortgage broker for a settlement statement and was advised that $371,108.90 (the settlement sum) was due and owing.

The contributory mortgage broker told Liam’s broker that it had applied the extension clause in the agreement which had extended the loan term for a further two months and had attracted a 3% re-establishment fee of $10,650. The settlement sum also included the loan principal of $355,000 and penalty interest and other fees of $5,458.90.

Liam reluctantly paid the settlement sum but was angered at the costs charged between September and November 2016. Liam complained to FSCL.

Liam’s view

Liam felt that the contributory mortgage broker had acted unfairly in charging the re-establishment fee and interest under the agreement.  Liam considered the contributory mortgage broker was reasonably compensated by charging default interest and that the agreement should not have been extended. Liam felt the re-establishment fee was an unreasonable credit fee.

Liam also felt that the contributory mortgage broker should have contacted him directly to advise him about the imminent expiry of the loan.

Liam wanted to be refunded the $10,650 re-establishment fee.


We investigated Liam’s complaint and completed a review of the agreement.

We found that the agreement was not a consumer credit contract because it was arranged in the name of Liam’s company. The agreement’s terms were clear that the funds could not be used for consumer or household purposes and we were satisfied that, in all the circumstances, the loan was intended and used for commercial purposes.

As the agreement was not a consumer credit contract, the responsible lending and unreasonable credit fee legislation did not apply to the agreement.

We considered that because Liam had taken independent legal advice on the nature and effects of the agreement he should have been aware of the agreement’s terms.

There were also emails between Liam’s broker and the contributory mortgage broker that showed that Liam was advised of the impending end of the loan and that Liam’s broker had determined it would be best for Liam to continue with the expired agreement, rather than immediately enter into a new finance arrangement with a second tier lender.

The contributory mortgage broker was not obliged to notify Liam that the end of the term was near. In our view, Liam was responsible for knowing the relevant repayment dates in the agreement.

The extension clause was found to be part of the agreement and no additional notice or agreement was required from either party for it to take effect. The extension clause was clear it would apply if the loan was not repaid in full on the due date. We found there was no reason that the extension clause should not have applied to Liam and the contributory mortgage broker.

We did not consider that the re-establishment fee was a penalty. The re-establishment fee’s purpose was to cover the costs associated with the contributory mortgage broker’s investors having to wait for the repayment of their money and delay other investments, and the broker’s costs involved in securing finance for a further two months. We considered the re-establishment fee was an industry standard fee and that it had been reasonably disclosed.


We were satisfied that the contributory mortgage broker had acted fairly and complied with the terms of the agreement. Liam accepted our findings.

Our insight

It is very important to read and understand the terms of any finance contract before you sign it. Keep careful notice of the important dates in the contract to avoid any default or extension fees that may apply if you default.