Advisers told not to overpromise

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A mortgage adviser has reimbursed $5,556 in marketing and legal costs to a couple who complained to Financial Services Complaints Ltd (FSCL) that it took three months to find out they couldn’t get finance to buy a motel after they sold their house.

Monday, March 10th 2025, 8:46AM 2 Comments

by Sally Lindsay

A mortgage adviser has reimbursed $5,556 in marketing and legal costs to a couple who complained to Financial Services Complaints Ltd (FSCL) that it took three months to find out they couldn’t get finance to buy a motel after they sold their house.

In May last year the couple contacted the mortgage adviser for help to obtain finance to buy a motel they planned to move into and run as a business together. They gave the adviser information about their business plan and finances between May and June.

It wasn’t until July the couple were told by the adviser the bank would only lend them 65% of the registered valuation of the motel and only if the motel met 67% of the earthquake code.

Concerned, the couple contacted another adviser, who was quickly able to explain the bank’s lending criteria to them and that in their circumstances the motel they were looking at would not meet the bank’s criteria.

The couple complained to the FSCL the first adviser had led them to believe for almost three months they were eligible to obtain a loan to buy the motel, had reassured them that they would get finance, and had taken too long to explain the bank’s lending criteria.

Relying on the adviser’s advice, they had listed their home for sale, put in an offer on the motel, and had incurred legal and marketing costs totalling $5,556.

When the FSCL investigated it was unclear why it had taken almost three months for the adviser to get the lending information from the bank.

However, the information the adviser gave the FSCL was incomplete and missing key pieces of information.

“Specifically, the adviser had not given us all email correspondence between himself and the couple. He had not kept any file notes of the calls, meetings and advice he had given to them, the FSCL says.

“This is because there were lengthy delays in getting information from the adviser and participant, and when the information was provided, it was incomplete.”

The FSCL says advisers should not overpromise on the likelihood of obtaining lending.

“This can lead to disappointment or the consumer taking actions that might result in a loss, like the couple listing their house for sale in anticipation of moving into a new business and accommodation,” it says.

The complaints authority also reminded advisers must comply with their record keeping obligations and must provide their full file to it to assist in investigations.

“We would usually expect to see file notes of calls or meetings, particularly where advice has been given. If the adviser does not have records, we are likely to place more weight on the consumer’s summary of events.”

The adviser agreed with the FSCL to reimburse the couple their costs to resolve the complaint. 

Is mortgage adviser at fault?

In another case, the FSCL says a mortgage adviser is not responsible for lender policies, the pricing of their products or their decisions on loan applications. Nor can advisers predict what interest rates will be in the future.

The ruling from the FSCL comes after a home owner met with a mortgage adviser about getting finance to buy a section and build a new house on it. He already had a home with a $440,000 bank mortgage.

In February last year, one lender was willing to finance the new home construction and refinance the home owner’s existing loan.

By March, the new lending has been put in place and the refinanced loan had a fixed interest period of one year.

Five months later, the home owner’s car was stolen and he asked his mortgage adviser if he could get a top-loan from the lender, but this was declined as it was outside their lending criteria.

However, the home owner sometime later went to the lender direct for a top-up loan and was given a personal loan.

The home owner thought his adviser had not done a good job and some of his friends had been able to get better lending deals so he complained to the FSCL in November last year on the grounds:

• the mortgage adviser should have arranged for the interest rate on his original loan to be refixed from 5 February 2024 until the new lending came through;
• his friend had been to get a 1% cashback with a different bank however the mortgage broker was only able to get him an 0.8% cashback;
• his new lender’s cashback period was four years, however other lenders had three year cashbacks; and
• the mortgage adviser had fixed the interest rates on the refinanced loan for “too long”.

The mortgage adviser did not agree that he had done anything wrong.

The FSCL agreed and after reviewing his full advice file says he had done a good job.

Fixing the interest rate while waiting for the new lending to come through

The home owner thought the mortgage adviser should have arranged for the interest rate on the loan with his old bank to be refixed on 5 February 2024 until the loan was refinanced. We did not agree. It is not normal practice for lenders to fix the interest rate on a loan when they are aware the loan may be repaid during the fixed rate term. The home owner’s old bank’s shortest fixed rate term was six months.

If a loan is repaid or refinanced within a fixed rate term, the borrower may have to pay a significant break cost. Break costs cannot be calculated in advance because the calculation depends on knowing the date the borrower will repay and the interest rates applicable at that future point in time. These factors are not known in advance.

We would not expect a mortgage adviser to recommend fixing an interest rate when a loan is to be refinanced within weeks.

Terms of cashback

We noted the home owner was aware of the terms of the cashback the new lender had offered. Further, the mortgage adviser told the new lender about the home owner’s request for a cashback on better terms, but the lender declined. The home owner accepted the cashback on the terms offered by the new lender. A mortgage adviser cannot make a lender offer a cashback on different terms. Lenders set their own pricing, and this is not a matter within a mortgage adviser’s control.

Interest rate fixed for “too long”

The home owner’s belief the mortgage adviser had arranged for the interest rate on the refinanced loan to be fixed for “too long” arose out of his concern that interest rates declined after he took out the loan. He appeared to believe the mortgage adviser knew what would happen to interest rates in the future. However, interest rates fluctuate, and it is not possible to predict future movements in rates. In having the fixed rate for the year, the home owner had the benefit of certainty about what his repayments would be over this period, and he did not have to worry about the possibility of interest rates increasing during this time. 

When the home owner raised the issue in November 2024, the mortgage adviser carried out the calculation but did not recommend breaking the loan at that point. While it may have been possible to get a lower interest rate, the break fee meant that it would not be worthwhile. The mortgage adviser recommended waiting until the home owner’s fixed rate period expired in March 2025, given there were some indications the Reserve Bank may reduce the OCR in February 2025, which could lead to lower interest rates. If this occurred, the home owner would gain the benefit of lower rates without having to pay a break fee.

The top up application

The home owner was concerned the mortgage adviser had not been able to get him a top up loan when his car was stolen, but he was later able to get a loan by going directly to the lender. The mortgage adviser showed us that he had contacted the lender seeking a top up, but the lender said the application did not meet their credit criteria. While the lender changed their mind several months later and approved a personal loan, we could not say that the mortgage adviser was responsible for the lender’s initial decision to decline.

Tags: FSCL

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