What rights and responsibilities do you have when taking out a home loan?
At some stage of our lives, most of us will have to borrow money, whether it’s to help buy a car, afford a holiday or even to consolidate debt. But by far, the most common reason people need to borrow money from a bank is to buy a home.
But do you know what rights and responsibilities you have before and after taking out a home loan? While it’s easy to get swept up in the excitement of buying a property, it’s vital that you know exactly what you’re getting yourself into and what will happen if you can’t make your repayments on time.
If you apply and are approved for a home loan, there are consumer credit laws in place to protect your rights. The National Consumer Credit Protection Act 2009 (the “Credit Act”) outlines consumer rights for many different types of loans, including home loans and car loans. These rights include:
- Specific important information must be included in your home loan document, such as the interest rate, the time you have to repay your loan and the total amount to be repaid.
- You are allowed to apply for a new home loan repayment arrangement if you experience financial hardship.
- If you miss any repayments, the lender must issue a default notice that gives you at least 30 days to catch up on payments in arrears. This notice must be issued before court action can be taken or the loan security repossessed.
- If your home or car (or whatever is used as the security for the loan) is to be repossessed, the lender must follow certain procedures.
What types of loans does the Credit Act apply to?
The National Consumer Credit Protection Act 2009 applies to a wide range of credit products, including:
- Home loans
- Car loans
- Personal loans
- Credit cards
- Consumer leases (e.g, car leases and rental contracts for goods)
- Investment property loans
However, there are certain loans the Act does not apply to, such as business loans and investment loans for shares.
What must a lender do?
The Credit Act also stipulates that anyone who wants to engage in credit activities, including lenders and brokers, must be licensed with ASIC (the Australian Securities and Investments Commission) or be a representative of someone who is licensed. You can search ASIC Connect's Professional Registers or phone ASIC's infoline on 1300 300 630 to check whether your lender or broker is properly licensed.
By law, credit providers must only lend money responsibly. This means they must not enter into an unsuitable loan contract with you, for example, a mortgage that does not meet your financial objectives or that you will be unable to repay without enduring financial hardship.
The Act states that, by law, credit providers must:
- Make reasonable inquiries about your financial situation, as well as your needs and objectives.
- Take reasonable steps to verify your financial situation, such as by requesting information about your income, assets and liabilities.
- Decide whether the credit contract you are applying for is “not unsuitable” for you.
There’s also a requirement for lenders and finance brokers to provide you with a credit guide and credit proposal disclosure document before you sign the loan contract. This should include details such as the lender’s licence number, contact information, fees and an explanation of your right to complain or access an external dispute resolution scheme.
Choosing a home loan
Choosing a home loan can be a daunting and confusing experience, but remember that you have the right to shop around. If a lender is trying to pressure you into applying for a loan, you can refuse them. You can save a lot of money by shopping around, so don’t be afraid to look for a better deal elsewhere.
Just remember to take into account interest rates, fees and other flexible features such as additional repayments and offset accounts when comparing loans. Of course, you’ll also need to work out a budget to make sure you will be able to afford loan repayments now and in the future.
If you’re considering applying for a particular loan, the home loan contract your lender will prepare for you must contain all the following information:
- Details of your lender’s ASIC licence
- The total loan amount
- The total amount to be repaid over the life of the loan, including interest payments
- The loan interest rate and whether it is fixed or variable
- Whether the loan is secured
- How long you have to repay the loan
- The amount and frequency of your loan repayments
- Whether additional repayments are allowed
- Whether you will need mortgage insurance
- Early repayment fees
- What happens if you miss a repayment
If any of the above details are not contained in the contract, ask your lender to include them. If there’s anything in the contract that you’re unsure about, ask the lender to provide clarification. You also have the right to request that some of the conditions of your contract be changed and if the lender refuses you can always walk away from the loan.
Finally, we should also point out that if a lender advertises a fixed-rate loan, under consumer credit laws the lender must also include in your contract a comparison rate, which takes into account the interest rate and most fees and charges.
What if I want to withdraw from a loan contract?
You have the right to withdraw from a credit contract at any time before the credit is first provided. You will need to provide written notice if you wish to do so, but it’s recommended that you seek independent legal advice before taking this course of action.
It’s also important to remember that you don’t have to stay locked into a loan contract that doesn’t offer the best solution for your financial requirements. If you want to take advantage of lower interest rates or more suitable loan features with another lender, you have the right to refinance to another home loan. However, be aware that loan exit fees will apply.
What if I get a default notice or can’t repay a loan?
If you receive a default notice from a credit provider, the best thing you can do is pay the amount owed on the default notice (and your normal repayment amount) before the deadline detailed in the notice. Doing this means the lender will be unable to proceed with efforts to repossess the loan security, such as your home or car.
However, if you’re unable to pay the amount you owe, you do have several other options, including:
- Negotiate a repayment variation. The lender may agree to postpone your repayments or vary their amount for a temporary period. Or, if you won’t be able to make repayments for a long time, you can try to negotiate a permanent adjustment.
- Apply for a hardship variation. If you are experiencing financial hardship, for example, if you’ve unexpectedly lost your job, you may be able to apply for a hardship variation under the credit law.
- Apply for Mortgage Assistance. You may be eligible to apply for the early release of your superannuation benefits to help you make your mortgage repayments.
- Refinance. Now might be the time to look at refinancing your loan to take advantage of more affordable repayments.
- Sell up. You also have the option to sell the security for the loan, such as your home or car, and use the proceeds to pay off your debt.
Case study: Dave falls behind on his loan repayments
Dave is paying off a $300,000 mortgage on his Sydney apartment and hasn’t missed a repayment since he took out the loan two years ago. However, when Dave’s employer, an IT consulting firm, goes bust and Dave loses his job, he soon falls behind on his loan repayments.
Rather than waiting for default notices to start arriving, Dave decides to take action. He contacts his bank to let them know about his changed circumstances and to apply for a repayment pause.
After taking into account Dave’s good repayment history, not to mention the fact that he is one month ahead on his loan repayment schedule, his bank agrees to let him take a three-month break from mortgage repayments while he searches for a new job.
Within six weeks, Dave finds a new job and is able to resume making repayments towards his loan.
What if I have a complaint?
If you feel that you have been unfairly treated by your lender or finance broker, or that your lender or finance broker has breached their professional duty or obligation to you, the first step is to contact your lender or broker directly and complain. You should put your complaint in writing and follow the complaints handling procedures the lender or broker has in place.
If you’re unhappy with the response to your complaint, you can then take your dispute to either the Financial Ombudsman Service or the Credit and Investments Ombudsman. These external dispute resolution (EDR) services are free to use and completely independent, and approaching them means that all enforcement action (for example court proceedings) will stop while your dispute is considered.
If you and your lender or broker cannot reach an agreement, the EDR service will make a decision. If you accept the decision, it is binding for your lender or broker. However, if you do not accept the decision, you have the option of taking the matter to court. The contact details of Australia’s two EDR services are listed below:
FOS: Financial Ombudsman Service Australia
Phone: 1800 367 287
CIO: Credit and Investments Ombudsman
Phone: 1800 138 422
Where can I get help and advice?
If a dispute regarding your home loan or any other type of credit threatens to disrupt your finances or could see you end up in court, we recommend that you seek independent legal advice.
You can also obtain specialist credit law advice from a range of community legal centres in some Australian states and territories. The relevant contact details are listed below:
Consumer Credit Legal Centre (NSW)
Phone: 1800 007 007
Consumer Law Centre ACT
Phone: (02) 6257 1788