In the last few months, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Banking Royal Commission) released its report and made recommendations into the lending practices followed by the banking and financial services industry. This led many financial institutions to announce sweeping changes in their lending practices.
This month’s newsletter focuses on the legal and factual implications [a risk/benefit analysis of consequences] of elderly and vulnerable individuals directly or indirectly participating in contractual obligations with financial institutions and their associates. This article aims at alerting the elderly and vulnerable with some of the innovative ways that the financial industry may come up with in their lending practices despite the Banking Royal Commission’s recommendations.
A recent inquiry by an elderly couple to provide them with independent legal advice made me reflect as to whether the elderly and vulnerable are really in safe haven after the Banking Royal Commission.
A few weeks ago, an elderly couple visited my office and instructed me to provide them with independent legal advice as to a proposed transaction. The couple were both retired and received pension benefits. The couple had financially assisted one of their only biological children to purchase a home by borrowing monies and registering a reverse mortgage on their home. Subsequent to purchasing a home, that child declared bankruptcy for a brief period of time due to debts incurred by that child’s ex-partner. That child sought advice from a financial institution and a mortgage broker as to how he can reduce the rate of interest payable on his home loan and the interest payable on the reverse mortgage subsequent to both his parents passing away.
The financial institution granted an unconditional approval to re-finance his home loan and his parent’s reverse mortgage loan subject to his parents transferring their interest in their home to him. In return, both parents and that child would execute a deed of acknowledgement of debt. In this deed, that child would acknowledge that he has received the equity in the parents’ home as a loan and the parents would get a life interest to live in their home subsequent to transferring it to that child rather than receiving any purchase price.
The elderly couple were keen to know whether or not there were any significant risks in them transferring their home to that child.
The proposed transaction had the following three significant (factual and legal) risks:
Firstly, if both parents made a decision to transfer their home to that child without receiving any actual purchase price, they would not have any asset(s) nor any monies, which may assist the parents in meeting future medical expenses or expenses to live in a nursing home (if required). Further, at any future point in time if their child is not in a position to financially assist his parents to meet their future medical expenses or expenses to live in a nursing home the parents will be compelled to continue living in the property, which was transferred to that child, and be completely dependent on the pension benefits that they receive.
Secondly, if that child and his potential partner’s relationship is the subject of a Family Court proceeding, any asset(s) held by that child in his individual name will more likely than not be included in the joint asset pool and subject of Family Court orders. These orders may include dealing with all assets held by that child, including the property, which was transferred by the parents to that child. Any potential decision by the Family Court is likely to render the parents without a home and without any cash/monies.
Thirdly, if that child is unable to pay the mortgage monies to the financial institution for any reason beyond his control (for example, legal or medical incapacity to earn an income, any bankruptcy proceedings etc.), the property is likely to be subject of a foreclosure action by the financial institution. In the event that the financial institution makes a decision to foreclose the loan, it is entitled to sell the assets to satisfy its outstanding debt and pay the balance proceeds of sale to the registered proprietor, that child, thereby rendering the parents without a home and without any cash/monies. Should the parents make a decision to enforce their rights under any potential acknowledgement of debt, they are likely to incur significant legal costs without any guarantee of a favourable outcome.
In the given circumstances, the potential risks in transferring the property far outweighed any potential benefits to the parents and advised them that the proposed transaction is not recommended.
Note that this article sets out only one of several possible client circumstances.
Takeaway Message – Look before you sign your life away!
Elderly and vulnerable clients should be extremely cautious of the innovative ways that financial institutions and their associates may adopt to gain their patronage subsequent to the Banking Royal Commission report. We strongly recommend elderly and vulnerable individuals seek independent legal advice prior to signing off any legal or financial documentation. The intent of this advice is to ensure they are not rendered homeless or cashless. The potentially irreversible and extreme risks associated with their choices may significantly outweigh the seemingly natural benefits of doing so.
Please note that any information included in this article is general information only and does not constitute legal advice. Please contact us to discuss your particular circumstances.