Lender refunds $88k break fee on mortgage

Aman who sold his house to move into a rest home complained after he was charged an $88,000 break fee to close off his equity release loan early.

He took his complaint to Financial Services Complaints (FSCL), which deals with complaints between financial service providers and clients which cannot be resolved directly.

The man had initially taken out an equity release loan, also known as a reverse equity loan or reverse mortgage, in 2008.

He and his wife borrowed $109,350 against their home, with an interest rate of 11.19%. They understood the loan would remain in place until they both died or sold the house.

The woman died in 2017 and towards the start of this year, the man’s family became concerned about his health. He decided to sell the house and move to a rest home.

A doctor agreed he would benefit from living in an independent living unit but his health deteriorated and he moved into the hospital care wing of the rest home 10 days after shifting in.

When his lawyer received the settlement amount from the reverse mortgage lender after the house was sold, it included a break fee of $88,000 on top of $500,000 needed to repay the original loan and interest.

The lender said the man had repaid the loan ‘‘voluntarily’’, and under the loan agreement the couple signed in 2008, a fixed-rate break fee was payable.

‘‘Voluntary’’ repayment would include situations where a borrower moved into an independent living unit at a rest home.

The break fee would not apply only if both borrowers died or moved into longterm care in a hospital situation.

Although the man was by that stage in hospital care and the fixed rate break costs would not apply, at the time he repaid the loan the lender considered the repayment voluntary.

FSCL said that although the lender’s decision was technically correct, it was ‘‘rather arbitrary’’.

If he had waited 10 days before repaying the loan he would not have been charged the $88,000 fee.

He died a short time later. On reconsideration the lender agreed, without any admission of fault, to refund the $88,000 fixed rate break fee to his estate.

‘‘Before entering into a reverse equity loan, a borrower must take legal advice. Although the lawyer should have explained the terms of the loan, when it actually comes time to repay, memories might have faded, and the amount required to settle the loan may seem large,’’ FSCL said in a case note.

‘‘On this occasion the circumstances allowed the lender to make an acceptable offer, but if [he] had simply downsized his home and continued to live independently the lender might have been entitled to charge the fixed rate break fee.’’

Katrina Shanks, chief executive of Financial Advice NZ, said elderly people could see their circumstances change rapidly and needed to understand the terms of any loan before making any lifechanging decisions.