In 2018, we have all listened with great interest to people recounting their experiences with the banking industry.
Whilst many of the encounters have had a devastating effect on the people involved, few of their stories surprise the legal profession – and no doubt many others.
At some future time, the Royal Commission will release a detailed report containing recommendations for a raft of changes.
When reading many of these harrowing stories, a consistent factor appeared to be that legal advice was either not obtained, or if obtained – was not acted upon.
Today’s brief article is intended to give you an idea why a lawyer should often be the first person to speak with when contemplating many finance transactions.
This article is not about someone buying their first home, or someone upgrading their home. The emphasis of this article is very much on those people who are borrowing money secured against real estate assets to buy investments – such as real estate, shares or businesses.
Loan Application Process
Most people don’t think to consult a lawyer when borrowing money from a bank. You don’t “need” a lawyer to borrow money. Lawyers aren’t finance brokers. Lawyers aren’t financial advisers. And of course lawyers and Australian law societies don’t actively promote the benefits of legal advice.
You need money! You contact a bank or a finance broker, submit an application, and provide your employment – income documents to verify you can repay the money. The bank assesses the value of the property being offered as security, and if it fits within their criteria, a loan is approved.
This all sounds straight-forward, although there is a lot of work involved for the Finance Broker.
Common Scenario
A little while ago, a friend asked me to witness some loan and mortgage documents for them. The loan had been arranged some time ago, but the “paperwork” had just been issued. They needed to get the documents signed and returned to the bank that day. They were sweating on getting the cash as they were embarking on a big project!
The documents (from one of the big 4) were delivered to me. I reviewed them. I sent a text message to the friend which said something like: “these are the worst set of loan documents I’ve ever seen”.
The loan documents, in typical fashion, took security over every piece of real estate they had. All properties were connected under the loan, no property could be released without the entire loan being reviewed. The properties secured were excess of the bank’s needs applying usual loan to value ratio. Of course, from the bank’s perspective, every aspect of their loan offer was reasonable.
However, as I said at the outset, I was only asked to witness the documents and I wasn’t providing advice. In my friends mind, the deal was done, and they would get access to more than a million dollars as soon as the signed documents were processed by the bank. They proceeded with the loan, and at that point the bank took complete control of their entire real estate portfolio.
Why engage a lawyer?
Lawyers are not authorised to recommend whether or not someone should borrow money, in the same way that we cannot recommend someone to buy a property. What we can do is explain to you what the consequences are of signing the loan and mortgage documents or the purchase contract.
The value you get from engaging a lawyer will be far greater where you make contact at the very start of the process – before you have taken any other action.
I’ve read comments that about 15% of the population will retire financially independent, with the remaining 85% at least partially dependent on government support. It’s likely that those 15% treat lawyers as part of their wealth management team; whereas the 85% are more likely to treat lawyers as an expense to be avoided and minimised at every opportunity. The 15% get the connection.
Benefits of obtaining advice
One of the benefits is keeping as much control over your assets as possible, by limiting the control that you hand over to your lender. Using different lenders for different properties is a good place to start. This is an asset-protection strategy, but one that also gives your greater flexibility and freedom.
When using different lenders, you can refinance one property, or sell one property, without your entire loan portfolio being reviewed. This avoids considerable time and expense, avoiding the cost of properties being revalued, and providing documents verifying your income and asset position.
Hand control to your bank!
What is difficult to communicate is the anguish and torment suffered by people when their bank was in complete control of their property assets. The bank used their power to benefit themselves, with little or no regard for the consequences. Read some of the media reports from the Royal Commission hearings.
Clients have recounted what the Big-4 banks (& other lenders) have done to them. One bank customer had made a “perfectly reasonable request” to defer the loan repayment for 12 months, as they wanted to upgrade the property and then market and sell to achieve the maximum result. The LVR was well below 50%, it was a quality property in a good area. There was simply no risk that an excellent result would not be achieved for all concerned.
The bank rejected the request, and after what was described as a poor marketing campaign, the property was sold at a heavily discounted price – and all profit for the owners was extinguished. The bank recouped all their cash – happy shareholders! A performance bonus for the banker perhaps!
When to contact a lawyer?
If you intend to borrow money (using real estate as security) to buy assets like property or shares, talk to a lawyer first about your plans. If you intend to refinance an existing loan, talk to a lawyer first about your intentions.
When buying a property, if you signed the contract before contacting the lawyer, it may be too late to make the best use of their advice. Once a Contract is signed, you are busy complying with your lender’s requirements, and responding to your lawyer regarding the conveyancing process.
When using the equity in an existing property to partly finance a property purchase or other investment, your existing lender may be able to provide a new and separate loan facility created solely for investment purposes. You may be able to complete this process before you purchase the new asset.
In our experience, many Finance Brokers recommend a new Lender refinance the existing loan and provide the funds for the new purchase. Whilst there are sound reasons for this approach, you may be giving your Lender far too much control and influence over your property portfolio.
Every circumstance has to be individually considered. You may have options to consider – with benefits but corresponding disadvantages:
A “simple, quick and relatively easy” finance arrangement may be available, which relinquishes control to your bank.
A more “complicated and time-consuming” finance arrangement may be available, however you maximise the control you retain over your real estate assets.
Disclaimer: The above is to be considered as general education. This is not advice and it is not to be acted upon without advice from a qualified professional who understands your personal circumstances.
Copyright © 2018 Wockner Lawyers. All Rights Reserved. Contact Wockner Lawyers – [email protected]. This article may not be used without the prior written consent from the author. See below for more details…
DO YOU WANT TO USE THIS ARTICLE IN YOUR E-ZINE OR WEBSITE? You can, as long as you include this text copy in its entirety:
For assistance with your next Property and Conveyancing transaction, or your Wills and Estate Planning arrangements, contact Wockner Lawyers.