A family dispute over a jointly-owned property has resulted in a New Zealand bank being ordered to pay ’s equivalent of approximately $6,700 USD to a woman who was prevented from repaying her son’s mortgage, according to a case note published by the Banking Ombudsman scheme.
The case, originating in , centers around a partnership formed between a mother and her son and daughter-in-law to purchase a home. The trio jointly secured a $320,000 loan, with each party holding equal responsibility for repayment. When the son and daughter-in-law later separated, complications arose that highlighted the potential pitfalls of co-ownership and the importance of clear agreements.
The core of the dispute stemmed from the bank’s decision to freeze the loan accounts and refuse to process any instructions until the separating couple resolved their differences. Despite the mother offering to repay the entire outstanding loan balance, effectively discharging the mortgage, the bank remained steadfast in its refusal to act. This stance, the Banking Ombudsman found, was unwarranted.
The Ombudsman’s investigation revealed that the bank’s actions were inconsistent with the terms of the loan agreement and the rights of each borrower. The agreement stipulated that each borrower had the independent right to repay the loan at any time. The mother held a 77% stake in the partnership, granting her the authority to pass resolutions without requiring the consent of the other two parties.
“We pointed out the dispute among the three borrowers had no effect on the right of each borrower to repay the loan at any time,” the Ombudsman’s case note stated. “The terms and conditions of the loan allowed for just such a step.”
The bank ultimately conceded and offered the woman $10,000 in compensation for the inconvenience and frustration caused by its handling of the situation. Banking Ombudsman Nicola Sladden emphasized the importance of clarity and foresight when entering into joint property ownership arrangements.
“When relationships end, joint accounts, loans and partnerships can become tricky,” Sladden said. “It’s crucial to understand how your accounts are set up, and what your rights and obligations are. This knowledge can prevent a difficult situation from becoming even more stressful.”
The case serves as a cautionary tale for individuals considering purchasing property in partnership, particularly with family members. While such arrangements can offer advantages, such as combining deposits and income to secure more favorable loan terms, they also carry inherent risks.
Jeremy Andrews, a mortgage advisor at Key Mortgages, noted that he regularly advises clients interested in joint property purchases. He highlighted the potential benefits, including increased borrowing power and access to better interest rates. However, he also underscored the critical importance of addressing potential exit strategies upfront.
“There needs to be a clear understanding of the future implications at that point, before entering into such [an] agreement, and we always recommend each party seeks independent legal advice on this,” Andrews stated. A key consideration is the concept of ‘joint and several liability,’ where each borrower is individually responsible for the entire loan amount. This can create significant challenges if one party wishes to sell their share of the property or obtain financing independently.
Andrews also explained the alternative arrangement of owning property as ‘tenants in common,’ which allows for specified ownership percentages. This structure provides clarity regarding the division of proceeds upon sale, but also requires careful consideration of potential financing hurdles if one party seeks to buy out the others.
“If the property increases in value over time, then each party receives their respective percentage increase in value each when the time comes to sell – hopefully for an overall profit,” Andrews explained. “There are also downsides to this type of arrangement, such as if one or more of the co-borrowers wish to retain ownership of the property and then based on the income they have at the time, can they buy out the other exiting parties share of existing mortgage – plus typically accumulated equity on top of that.”
The Banking Ombudsman’s case highlights a broader issue within the financial sector: the potential for banks to overstep their authority when navigating complex personal disputes. While banks have a legitimate interest in protecting their financial interests, they must also adhere to the terms of their agreements and respect the rights of individual borrowers. The $10,000 compensation serves as a reminder that failing to do so can result in financial penalties and reputational damage.
The case also underscores the importance of proactive legal counsel when entering into any joint financial arrangement. A well-drafted partnership agreement, outlining clear procedures for dispute resolution and asset division, can mitigate the risk of costly and emotionally draining conflicts down the line. As Sladden advised, understanding your rights and obligations is paramount to preventing a difficult situation from escalating.
