Reverse mortgage shock
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Ms B, aged 64, decided to talk to her bank about obtaining a home loan in order to purchase a new home.
Ms B had only $5,500 left to pay on her home loan and she approached the bank to borrow more money to purchase a new property.
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Ms B was informed that, because of her low income, she could not increase the amount of her current home loan as she would not be able to afford the repayments. However, she was also advised that once she turned 65 she would be eligible to obtain a reverse mortgage.
A reverse mortgage does not require regular repayments. Instead, interest is added to the loan balance and compounds. The loan is required to be paid out when certain events occur, for instance, if the property is sold, the borrower moves out of the property or dies, or the borrower defaults. Default provisions vary.
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Ms B buys a new home
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In November 2006, Ms B signed a contract to purchase a new home. After she sold her existing home she required an additional $58,000 to cover the cost of the new home and pay associated costs. Ms B, who had now turned 65, approached the bank about obtaining a reverse mortgage over the new property.
In December 2006, the bank agreed to provide Ms B with a reverse mortgage and issued her with a loan offer.
Ms B was told by the bank that she needed to obtain independent advice about the loan offer before it would proceed with the loan. The bank recommended that she see Mr A, an accountant.
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Ms B seeks independent advice on the wrong documents
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Ms B took the loan offer with her to the appointment with Mr A. However, due to a bank error, the loan offer was not for the bank’s reverse mortgage product but for another product. Ms B said that the accountant did not, therefore, explain the reverse mortgage product.
Mr A disputed Ms B’s recollection of the meeting. He said that the advice he provided did not relate to any particular product but discussed, in general terms, how reverse mortgage loan products work.
Ms B said the appointment with Mr A lasted 10 minutes. She paid Mr A $50 for his advice.
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Right documents provided
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Shortly after Ms B signed the loan documents, the bank, in mid-December 2006, realised that it had issued Ms B with incorrect loan documentation and faxed a new set of loan documents to Ms B’s branch. Ms B signed the new documents, including a disclaimer stating that she had received independent advice even though she did not read the documents or have them explained to her by an independent adviser. Ms B was not given copies of the documents at the time. The manager at the branch then faxed the disclaimer to Mr A for him to sign.
The property settlement occurred five days later.
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Ms B shocked at the impact of compound interest
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In January 2007, Ms B requested and received a copy of the loan documentation she had signed on 14 December 2006.
Ms B requested and received a balance schedule which showed the effect of compounding interest on the balance of the loan. The schedule showed that, over a ten year period, the estimated balance of the loan (if no repayments were made) would increase from $58,000 to $126,511. Ms B said that, had she realised the effect of compound interest over this time, she would not have entered into the loan.
Ms B phoned LifeLine to seek help with her situation.
She was referred to a Community Legal Service who advised her to write to BFSO.
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BFSO’s approach
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Ms B sent BFSO copies of the loan documentation and a letter outlining her complaint that the bank had given her a loan product which was not suitable for her and had not allowed her sufficient time to seek advice before signing the loan documentation. The BFSO reviewed Ms B’s correspondence and asked the bank to respond to her concerns. The bank maintained that the working of the reverse mortgage facility was adequately explained to Ms B by the bank staff and Mr A. However, it admitted that it had initially provided loan documentation for the wrong product.
BFSO under its Terms of Reference also has regard to applicable industry codes or guidelines. The bank in this case was a member of the Senior Australians Equity Release Association of Lenders (SEQUAL) and had agreed to abide by the SEQUAL Code of Conduct. The SEQUAL Code requires, among other things, that lenders ensure that borrowers obtain independent legal advice from the solicitor of their choice and make available to borrowers a tool illustrating the potential effect of the capitalisation of interest on the loan.
In this case, the bank had not ensured that Ms B obtained independent legal advice and the schedule, setting out the effect of the capitalisation of interest on the loan, was not provided to her until after she had signed the loan documentation.
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Resolution of the dispute
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The dispute was resolved between Ms B and the bank after the case went into investigation.
Ms B was adamant that she would not have agreed to the loan if she had known that the balance would increase. She wanted to make payments sufficient to cover interest and in the amount that she had been paying on her previous loan. The bank agreed to Ms B’s request and reduced the interest rate on her loan by a margin of approximately 5 per cent so that repayments in the order of $75 per fortnight were sufficient to meet the interest charged on the loan. It was agreed that the interest rate would vary with future interest rate changes but that Ms B would not be charged for valuations on the property, which would otherwise be required every two years, if the loan balance did not exceed $58,000.
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