Loan trap for rental vendors

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Be warned. Investors with a rental property they want to sell should check how much the bank lender wants repaid.

Banking Ombudsman Liz Brown said her office was receiving some complaints about the behaviour of the banks to repayment of loans on rental properties that investors had decided to sell.

The complaints were usually from people who had lost their jobs or were going through hard times and felt the banks were treating them unfairly.

"The sorts of thing I'm getting for example are people ... who decide to sell an investment property, think they are only going to have to pay back the loan they took out to buy that property but then find the bank wants them to reduce all their lending."

The investors had expected to have some cash in their pockets after the sale and find the banks are requiring them to reduce the loans on other properties such as their home.

"We've had a few complaints of that kind." It was more prevalent among people whose equity in the home or rental property was quite thin and it was the kind of complaint related to times of financial hardship.

Brown said the banks were entitled to ask for repayment of other loans as well but should give customers warning "well in advance" so customers could organise their plans.

"So we've had a few cases where they've found out quite late in the piece that they would not get as much as they expected or in the worst case nothing at all."

Rental or investment property owners thinking of selling should certainly ask the bank if it would require other loans to be paid back with the sale proceeds, she said.

It might be a problem for owners with only 85 percent to 90 percent equity in a few properties but probably not for those with 60 percent to 70 percent.

The office had had many more complaints about banks in the past year, including break fees on fixed-rate loans and general financial hardship related to debt.

- © Fairfax NZ News