Consumer Affairs Victoria
Financial Services Factsheet
Mortgage minimisation
October 2003
Debt consolidation and mortgage minimisation schemes offer to save you years off your mortgage or save you thousands of dollars, but beware - high fees and charges may result in no actual savings.
Need more information?
Call Consumer Affairs Victoria Helpline on 1300 55 81 81 Debt consolidation and mortgage minimisation schemes are marketed by credit providers and brokers, sometimes promoting themselves as “debt reduction experts”. Consumer Affairs Victoria is concerned that these schemes may be misleading. Ask yourself: • Do you really understand the scheme? • Do you realise that long-term savings may arise because you pay higher instalments, paying out the mortgage early? • Do you realise that in many cases short-term savings from the scheme arise because you pay off the debt over a longer period under the new arrangement?
What is mortgage minimisation?
Credit providers and brokers advise you how to pay off your home loan early and save money in the process. To take advantage of the “scheme”, you are encouraged to refinance your existing mortgage into a new and “better” loan.
Quick Tip
If you are unsure whether you can pay extra on your existing mortgage ask your current credit provider.
www.consumer.vic.gov.au 1300 55 81 81
Financial Services Factsheet
What is debt consolidation?
Credit providers and brokers target consumers with multiple debts who are experiencing difficulty in meeting their repayments. The “debt reduction” involves consolidating existing debts (these may include store cards, credit cards, personal loans, car loans and home loans) into a single credit product.
How do debt consolidation and mortgage minimisation schemes operate?
You will usually be required to complete a budget plan and refinance your mortgage. Savings quoted in most cases actually arise from: • A budget that allocates a higher monthly repayment to your loan than you are currently paying. • Fortnightly instead of monthly repayments. • Where multiple debts are refinanced, a budget allocates a higher monthly amount to all your debts throughout the term of the new loan. STOP! In most cases it is not necessary for you to obtain new credit to reduce the term of your loan. You can usually achieve this by simply increasing the repayment amount on your current home loan and other debts.
Quick Tip
When considering debt consolidation it is important to compare interest rates, fees, charges and the length of the new loan with current debt commitments.
The 'new' consolidated debt may be: • a personal loan • a home loan. Generally, credit providers and brokers will only offer you debt consolidation when you own or are buying property.
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Financial Services Factsheet
Line of credit and mortgage offset accounts
The operators of debt consolidation and mortgage minimisation schemes often claim they can further reduce your loan term by depositing all your income into your mortgage account. You then use a credit card linked to the account to pay for all your living expenses, which are repaid from the account at the end of each month. Debt reduction programs often propose that you do all this by refinancing your current mortgage with a line-of-credit mortgage. In many cases: • You will already have a mortgage offset account or line-of-credit on your current home loan. • If you do not have an existing offset account or line-of credit, you may be able to set this up with your current lender. Even if you don't have this type of product or cannot set it up with your current lender, the actual savings achieved through paying income into the mortgage are minimal, and are often less than the fees and charges relating to the new mortgage product.
Hidden costs
Any proposal of debt consolidation or mortgage minimisation should take into account the costs you will incur by taking advantage of the scheme. These include: • any early repayment penalties on your existing mortgage • any fees charged by the credit provider or broker, including: • application fees • valuation fees • additional brokerage fees.
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Financial Services Factsheet
Date of Issue: October 2003
Further reading
Consumer Affairs Victoria has a range of financial services factsheets: • Borrowing money • Comparison rates decoded • Credit cards • Debt collectors: your rights in Victoria • Investment seminars and get rich quick schemes • Pay day lenders and the consumer credit code • Finance brokers • Vendor terms contracts • Dealing with credit problems
More information
Information on financial services is available from: Consumer Affairs Victoria Victorian Consumer & Business Centre 113 Exhibition Street Melbourne 3000 Telephone: 1300 55 81 81 Website www.consumer.vic.gov.au
The information contained in this fact sheet is of a general nature only and should not be regarded as a substitute for a reference to the legislation or professional advice. Authorised by the Victorian Government, 121 Exhibition Street, Melbourne, Victoria, 3000. Printed by Midway Press Print Management, 9 Third Avenue, Sunshine, 3020.
FS-13-01-908
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