Banking Ombudsman warns investors to check with their bank before selling properties to release capital

The Banking Ombudsman has warned owners of multiple properties to check with their bank before selling any of them to release capital.

That's because the bank may not let them keep as much of the sale proceeds as they would like too, requiring them to use some of the money to pay down any other loans they may also have with the bank.

"If a customer sells a property which is security for a loan, they usually keep the proceeds after the loan is repaid," Banking Ombudsman Deborah Battell said.

"However this may not necessarily be the case when a person has an 'all obligations' mortgage and a number of loans."

That would mean when the property was sold, as well as requiring the loan on that particular property to be repaid, the bank could require some or all of the remaining proceeds to be used to pay down other loans the same borrower may have with the bank.

"The bank must be satisfied it is left with sufficient security for its remaining property and other loans," Battell said.

"This sometimes means the amount owing on remaining loans needs to be reduced with proceeds from the property sale and this has been a nasty surprise for some customers."

That could occur if the borrower's financial situation had changed due to reasons such as a reduction in their income, which could affect their overall ability make loan repayments, or if properties' values had dropped, reducing the value of security for loans.

It could also be prompted by changes to the bank's lending criteria since the loan was advanced, such as the introduction of more stringent loan-to-value ratios (LVRs).

As a result of the complaints it has received, the Ombudsman has issued a guide, Selling Property to Release Capital, which explains some of the issues involved. 

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8 Comments

Wow Greg, very interesting article!
 
Those clever little bankers...
 
All the PI's should carefully read this article and the link to the banking Ombudsman.  This is very cunning and will catch many PI's if property prices fall. 

It's enough to make you consider more than one bank or at least keep what cash you can elsewhere.

I agree Spinach.
Recently i asked the bank to remove a mortgage they held on a commercial property which i had previously paid off - it was completely unencumbered.  The bank wriggled and wriggled when i pushed for the mortgage to be removed.... obviously I smelt a rat. 
 
In the background i had pre-approval for a loan for a residential property, should i find something which i liked.  These 2 properties were supposed to be not-related or linked in anyway, or at least that's what i thought and the bank had confirmed this verbally.
 
So now it makes sense why the banks wriggled when i wanted the mortgage lifted from the commercial property.... they were actually going to use the commercial property under the "all obligation mortgage" to support the new property - if they ever needed it.
 
Like i said, i smelt a rat but it's not until i read this article (and the link in it) that i better understood the true situation.
The lesson - NEVER trust your banker!

Not just that but your commercial property mortgage instrument is an asset the bank is holding - they have a mortgage and zero encumberance and zero risk from the co-owner.  That paper instrument is a lovely plum in -the-banks-own- security register for the bank to seek out financing...    Let me guess, they tried to talk you into further borrowing and buying instead or releasing the mortage document??

Yes - that is also what i suspected that the mortgage instrument was an asset to the bank even though there was no outstanding loan.
 
The bank pretty much tried every reason under the sun to try and talk me out of removing the mortgage.  In fact initailly i asked my solicitor to call the bank and get it removed but the bank wriggled and said we want to talk to the owner... unbelieveable really.
 
Wait until 1 December this year, all those PI's with 5 or more proerties will be treated as a business.  So if they do sell a property, i think the bank will go, "thank you Sir we'll take that profit to meet our new lending requirements".
 
 
 
 

Technically a PI is a form of sole trading anyway.  But formalising it as "a business" is simply a way of distancing the asset so it can be ring-fenced for Capital Gains Tax, and of course, for tax on unrealised capital gains.

I think that's what Gareths been talking about for the last year.   Anything for government to rort money out of people

putting the all in all advances...
 

Triple the banks have always done this........
Anyone going for a loan is often required to provide more security than what the loan is over.
For instance farmers might have a mortgage over their land, but are generally required to have all stock, plant, shares and anything else they may own to be provided as backing.
 
Personally I think it is a corrupt practice when they do this as it is not about the individuals ability to service the debt or their debt ratio it is about the bank having a whole heap of security on their books which supports other lending they have undertaken. One borrower is basically subsidising another.