I've written about these loans twice before, once when I first heard about them (mortgage accelerator – paying off early) and then again after I had done some additional research (mortgage accelerator – upon further review). Both of these posts generated a lot of conversation – online and offline, with various realtors and mortgage professionals. So I know the debate can get heated. I've also seen others write about this topic, most recently Christoph Schweiger on his real estate blog, and the resulting comments are generally similar.
After my last post, I began an email conversation with Carolyn Bond, CEO at the Consumer Action Law Center in Melbourne, Australia. Carolyn was nice enough to summarize a very lengthy topic, and allowed me to post it on her behalf. Please read on:
I am co-CEO at the Consumer Action Law Centre in Melbourne, Australia. Our centre is a non-profit, funded by the Legal Aid Commission and the Government Consumers Affairs Office (Consumer Affairs Victoria).
I look on with great interest at the promotion of "mortgage acceleration" type programs in the US. The type I'm talking about are ones that, in one form or another, allow all income to be paid into a line-of-credit (LOC) until required. Claims tend to be made that this can cut years off your mortgage without requiring additional payments.
US promoters are correct to say that this program was sold in Australia before it was "discovered" by US borrowers. However consumer organisations such as ours, and our national financial services regulator - Australian Securities and Investments Commission (ASIC) - concluded years ago that there were no savings to be made, and that promoters were engaged in unlawful conduct. Examples and charts showing massive savings have all been shown to include significant increases in payments being made to the mortgage (in addition to the funds deposited temporarily). Any savings made by depositing regular salary into the LOC amount to possibly a few hundred dollars per year, and unless the borrower has significant funds to deposit, these savings are less than the additional interest paid on the LOC - even if the LOC is quite small (say $50,000). Borrowers who pay any money for software, monitoring or other services, are often thousands of dollars worse off.
I don't personally know anyone who has used a LOC in this way, apart from consumers who come to our agency for assistance.
Our regulator ASIC says, on its website:
"in reality there is no magic trick or secret type of loan that will let you own your home sooner. Substantial savings are only achieved by consistently making additional payments on your mortgage. You therefore need to be very careful when brokers claim that you can own your home sooner and make substantial savings by using a line of credit mortgage facility."
ASIC has taken action against mortgage brokers promoting this type of product, as well as companies providing calculators to consumers and brokers. This action has resulted in:
- The withdrawal of a LOC Calculator that was on over 100 websites;
- Changes being made to a "Simulator" Calculator
- Court orders (by consent) against a company promoting "mortgage reduction", including orders that the company write to past customers advising they may have a right to claim loss or damage caused by misleading and deceptive conduct.
The misleading and deceptive conduct included showing clients comparisons between loans arranged by the company and standard loans, that represented that by switching loans they would save money and pay off their home loan sooner but failed to adequately explain that to obtain this benefit clients would need to make extra repayments.
Despite the action from the regulators above, there is still some promotion of this type of scheme, but much less than in the US.
For further information, see the following links:
(Note the example at this link).
Consumer Action Law Centre
26th August 2007
Thanks again to Carolyn for sharing this information with us.
- Chris Butterworth