The scenario
When you’re presented with clients with long-term stable employment, an existing well-conducted home loan, no credit issues, minimal other debt, strong servicing and plenty of existing equity in an established Brisbane metro house, you’d probably assume that the home loan application would be approved without any issues. This story reflects how something simple can quickly become a ‘big deal’.
When my clients came to see me, they assumed their loan would be easy to get. The reality, however, reflects how customers can be caught in a credit policy nightmare. They had been with their existing lender for 10 years and thought their loyalty to the lender would be enough to get this application approved. I won’t name the lender, but this story should serve as a warning to any borrower who thinks their lender will reward long-term loyalty.
The customers had engaged the services of a licensed tradesman to build a new kitchen and bathroom. They were seeking to access $60,000 from their loan to fund this renovation, which would allow them to update their 1970s house. Other than the kitchen and bathroom, the rest of the money they were seeking to borrow was to install new carpet and floorboards, as well as repair the roof, guttering and fencing. There weren’t any structural changes to the property that required council approval; this was purely a cosmetic renovation, along with essential repairs to help prevent issues in the future.
The issue arose when the couple were advised by the tradesman that they could save costs if they gutted the kitchen themselves. If they did this, the quote for works would be reduced. Prior to gutting the kitchen, the customers contacted their lender to seek approval for the $60,000. They received conditional approval subject to a restricted valuation, and their banker said this would not be a problem.
The customers proceeded with gutting the kitchen. Suddenly, they received a call from a valuer asking to book in an appointment to view the property. The customers agreed, and the valuer inspected the house. The day after, their lender contacted them to advise that the loan had been declined, saying the house was “uninhabitable” due to the missing kitchen.
This lender has now lost a strong and loyal customer ... it’s unlikely I will consider this lender for my future clients if they cannot look after their customers
It turned out that the lender had mistakenly ordered a full valuation when it should have been a restricted valuation. The customers appealed to the lender, which refused to budge, stating that it could not approve the $60,000, as the house was uninhabitable. The lender then accused the customers of modifying their security without permission.
The solution
Lenders can sometimes prevent good deals from being written purely due to credit policy. It makes no difference if the customer has an impeccable history and a good existing connection; a lender can make a small issue into a big deal.
I needed to find a lender that would consider the entire deal from a risk perspective, while making sure I could offer the customers a loan that suited their requirements.
I knew I needed to get another valuation to see if the valuer would consider the house to be acceptable security for a proposed lender. I arranged a new valuation and informed the valuer upfront about the gutted kitchen. Fortunately, the valuer deemed the house to be satisfactory and commented that the kitchen, although gutted, did not render the house uninhabitable.
The next issue was to find a lender with competitive interest rates that would take a holistic view of credit risk. I workshopped the deal with Westpac, which approved it with no issues whatsoever.
The takeaways
Customer loyalty is not rewarded by some lenders, both in the pricing of their existing loans and when customers think the lender will use sound credit risk judgment.
Lenders need to remember that a credit policy manual offers guidelines for differing matters, but a manual does not weigh up the overall credit risk. This lender has now lost a strong and loyal customer because they put a credit policy manual ahead of sound credit risk. Plus, it’s unlikely I will consider this lender for my future clients if they cannot look after their customers in a holistic manner.
I’m delighted I could help my customer in this scenario. I didn’t think this loan would be a ‘big deal’, but my customers now have a beautiful home they can be proud of and are paying 1% less in interest rates than they were previously.
I thought this deal presented an acceptable credit risk to the existing lender, but this story should serve as a warning to lenders: if you make a small issue into a big deal, then your customers will walk away.
Thuy Hook
Owner and mortgage broker,
EZ Financing
