What the heck is an Australian Mortgage ?

[United 1st]

thats a nice feature of the system. If you want to go out and buy a jet ski or a fancy new car you can punch in the cost and it will tell you how long it will delay you in becoming debt free.

It certainly makes people think twice about spending a lot of money!!!

[disneysteve]

I would think that for some people this Australian mortgage might ENCOURAGE them to save money.

True. By the same reasoning, some people purposely overpay their taxes so that they get a big refund each spring. They consider it a forced savings plan. It works, but that still doesn't make it a good idea.

[United 1st]

Yes disneysteve mindset and will power have a lot to do with it!

[Seeker]

disneysteve, don't you think as a Family Practice Physician your income is maybe a little more than the average American?

I know from my experience doing loans for Physicians they typically have the extra income to make extra principle paments, and congratulations for doing so!!!!

Wow. What a biased opinion.

My first loan on a condo was at a fixed rate, renogotiable in 7 years. Rather than re-negotiate, I paid months and months of princlpal extra and had the entire loan paid off in 6.5 years. As a single woman, with a mid 40k income those many years ago, I had a very good idea of where I wanted to be.

When I married, I got a Equity line of credit and starting paying another mortgage, but even then, we're going to be clear of this loan before the end of this year as well. True our income has doubled, but we are realistic with spending. That's all it takes to accomplish a paydown.

People DO what they want to do. Spending more money for this system does not make fiscal sense.

[Scanner]

When I left my home, my pappy gave me 3 pieces of advice.

He said, "Son, I want you to remember 3 things:

1. Always shake a man's hand with a firm grip.

2. Always look a person in the eye

and

3. Never invest or purchase a financial product that you don't understand." (like annuities)

This sounds awfully complicated to me, with stipulations and clauses.

This product best stay "down under."

[b4freedom]

Here is a general question:

With a mortgage rate of 5.625%, why would I ever want to pay it down? The effective rate after tax consideration is 4.21875%.

If you do the math and assume a 8% market return over 30 years, I'd be better off investing instead of paying off my mortgage. This is especially true for someone who hasn't taken advantage of all tax advantaged investments.

But, I guess that's another conversation.

Anyhow, I'm going to stick to my previous accusation: You’re Phishing for clients. But, I think you’re phishing in the wrong location.

[cptacek]

We've already talked about these extensively:

http://www.savingadvice.com/forums/personal-finance/36467-mortgage-accelerator-budgeting-tool.html

http://www.savingadvice.com/forums/personal-finance/30393-mortgage-programs.html

I am still of the opinion that this is a sucker's bet and one to be avoided at all costs.

[maat55]

When I left my home, my pappy gave me 3 pieces of advice.

He said, "Son, I want you to remember 3 things:

1. Always shake a man's hand with a firm grip.

2. Always look a person in the eye

and

3. Never invest or purchase a financial product that you don't understand." (like annuities)

This sounds awfully complicated to me, with stipulations and clauses.

This product best stay "down under."

Pappy's a wise man.

[bjl584]

This sounds too complicated to me. If someone has to go this route in order to purchase a home, then they should probably not be buying one. Save your money, set up a budget, get a traditional mortgage, and make a nice downpayment. That's my advice.

[disneysteve]

OP doesn't seem to be hanging around anymore. I guess he realized that we weren't buying what he was selling.

[Merch]

I would not recommend this product to anyone.

First of all is the cost. I have heard that the software alone runs about $3,500. I have never gotten a HELOC, but these sometimes carry fees like check writing, application fees, upfront fees, yearly maintenance fees, etc.

There is only one pay to pay off a mortgage early and that is to pay extra payments towards principal. There is no magic bullet. Live on less then you make and throw the extra at the mortgage.

They say it's too complicated. A call it a budget.

If you want to change your 30 year into a 15 year, use a mortgage calculator and pay the 15 year payments. Hey, that didn't cost you anything. Guess what you could do it for 5 year, 10 year, whatever you want.

Usually, the HELOC has a higher interest then the mortgage so you are trading in a portion of your 6% mortgage or less for what 6.5% or 7%. Why is it higher, because it is secondary to your first mortgage. If you could get a HELOC for a lower rate then your mortgage, I would refi my mortgage. To move my debt to a higher interest rate doesn't make much sense to me.

Lastly, a lot of people do not know how interest on mortgages are calculated. It is a simple interest calculation. They take the principal left on the mortgage that month times the interest rate divided by 12 (months). That's the interest they will charge you for the month.

It doesn't matter when in the month you send the payment because the calculation is simple interest and is not compounding daily.

So in summary, live on a budget, live on less then you make, and throw the extra at the mortgage. I just gave you a better program, that is simpler, and free. Just think of using all those fees and software costs against your mortgage. Might take a year or 2 off.

[b4freedom]

How it works

I’ve been thinking about the math behind this and have come to the following conclusion.

It’s true; you’ll save money following their method. HOWEVER, using their method is rather expensive up front and involves some level of risk that probably isn’t properly disclosed. Let me explain how it works and you’ll see that you can do it yourself without paying someone $3500 for some “fancy” software.

The first thing that they are doing is taking a larger loan, your mortgage, and paying it down with a cheaper smaller loan. Let’s assume that you have a mortgage for $200,000 for 30 years at 7%. The first month you would pay $1,166.67 in interest. Now, what their method is telling you to do is to take out a home equity line of credit (HELOC) and pay off a chunk of the larger loan. So, let’s assume you secure a HELOC for $30,000 at 5%. Your rate is 2% less then your mortgage. This saves you money simply because the rate is lower. Your mortgage drops down to $170,000 and your first month’s interest payment would be $991.67. Your HELOC’s first month’s interest payment would be $125. You saved yourself $50. You could now role that $50 back into the loan and pay it off faster. The disadvantage to this is that you have a flexible line of credit with a potential rate increase. If the rate adjusts higher you start paying more in interest. Is that a risk that is worth it?

The second thing that they are doing is assuming that you’ll pay more of your discretionary income towards the loan. This is a no brainer that anyone can do at any time with no risk. But, do you want to do this? Let’s assume you’re in the 25% tax bracket. After taxes your effective rate drops to 5.25%. You would probably be much better off investing your money. You would especially be better off if you invested it into an IRA or other tax advantaged investment.

The third and seemingly more complex thing that they are doing is using the HELOC as a checking account. Assuming you stay within a budget, this actually does save you money and let me illustrate why. Let’s assume the following: You get paid on the first of every month. Your bills are $4000/month and are all paid on the 15th of the month. So, for 15 days you are paying less interest because your balance is $4000 less. That $4000 will save you roughly $8.30/month. That $8.30 could be applied to the principle. Is $8.30/month worth it?

They also seem to be advocating using your HELOC as an “emergency fund” (EF). In theory this makes sense: Why have $20,000 EF earning 3% interest when you’re paying 7% on your mortgage? The problem with using a HELOC as an EF is those banks often include clauses which protect them. It’s often when you need the EF that the clauses kick in. You lose your job and/or miss a payment on your HELOC and then your bank jacks up the rate and/or charge you fees or even locks the HELOC so it can no longer be drafted against. But using a HELOC as an EF means that you’re using DEBT to pay DEBT. Using debt to pay debt is a dangerous trap.

In summary, this is something anyone can do without having to pay $3500 for expensive software. It might be worth if you’re willing to accept the risk of a HELOC, you have sufficient equity to take out a reasonable HELOC, you want to pay off your loan faster, you’d rather use a HELOC as a “emergency fund” instead of savings, you don’t mind using a HELOC as a checking account, and you have extra disposable income that can be aggressively applied to your debts.

[simpletron]

Thursday 16 September 2004


The Australian Securities and Investment Commission (ASIC) has acted to close down loan calculators on more than 100 websites of Australian financial institutions, including banks, credit unions, other lenders and finance brokers.

The calculators suggested that using a line of credit will result in the consumer paying off their home loan more quickly.

‘Most lines of credit charge higher interest rates than standard home loans, so when you stop to think about it, it was extraordinary to suggest that paying higher interest could pay off a loan sooner’, said Mr Greg Tanzer, ASIC’s Executive Director of Consumer Protection and International Relations.

The loan calculators produced a graph, comparing the time taken to pay off a standard loan with the time taken using a line of credit.

However, the way the calculator was designed meant that:
extra repayments were credited to the line of credit but not to the standard loan;
the line of credit was at the same interest rate as the home loan; and
these assumptions were not made clear to the consumer, so that the calculator showed that the line of credit was paid off more quickly than the home loan but it was not clearly stated that this was due to higher repayments by the borrower.
‘If financial institutions try to sell loans to consumers, such as lines of credit, through flawed comparisons, consumers may be misled into believing that there is something special about lines of credit which mean that you will own your own home sooner. That’s not true,’ Mr Tanzer said.

‘The only way to pay off your loan sooner is by moving to a loan with a cheaper interest rate or by making extra repayments. In fact, if you can afford to make extra repayments you will probably save just as much by making those payments on your existing loan, and you can avoid extra costs, such as early repayment penalties and application fees, by not refinancing,’ Mr Tanzer said.

‘The calculator software was produced by infochoice.com.au in line with industry specifications, and was used by over 100 lenders and broker groups.’

‘infochoice.com.au acted quickly to take down the calculators from over 100 websites once ASIC raised these concerns with it,’ Mr Tanzer said. ‘ASIC acknowledges the company took a co-operative and responsible approach that will benefit consumers.’
Background
Line of credit mortgages are generally interest-only loans with no set term for the loan to be repaid. The borrower then has the freedom to choose when they will make payments on the principal. Lines of credit may be good for people who have fluctuating incomes and may sometimes be able to make additional payments, but would also at times be unable to meet the normal repayments on a standard loan. They suit people who need a great deal of flexibility and can afford to pay a higher rate of interest. Borrowers who are not disciplined in their use of credit face the risk of only paying the interest each month, so that the balance of the loan never reduces.

A line of credit may also allow borrowers to make the bulk of their purchases or payments through a credit card with an interest-free period. This means that the borrower’s salary can sit in their loan account in the period between the date of purchase and the date of payment of the credit card. This mechanism slightly reduces the balance of the home loan debt for part of each month and therefore slightly reduces the interest payable. These types of savings are called offset savings. The credit card will be paid off each month by using your funds from the line of credit. The offset savings achieved for most people will be minimal.

The extent to which borrowers can repay their loan more quickly usually depends to a far greater extent on their capacity to make additional repayments, rather than through offset savings. Generally, borrowers who cannot afford to make significant additional repayments will be worse off refinancing to a line of credit, because a line of credit will usually have a higher interest rate and the higher interest charges may outweigh any offset savings.

ASIC is aware that some finance brokers promote the use of lines of credit as part of ‘debt reduction’ schemes. These schemes encourage borrowers to refinance to a line of credit with calculations, charts or graphs showing the balance of the line of credit reducing more quickly than the consumer’s existing loan. These calculations or charts may result in exaggerated claims about the amount of money consumers can save, where the broker makes unrealistic assumptions about the capacity of the borrower to make additional repayments.

ASIC’s consumer website FIDO has more information about loans and lines of credit.

that basically summarizes my thoughts on this. also the ASIC has taken legal action against financial institution that sold this product under the similar false pretense as being presented by United 1st

a line of credit mortgage is basically what is trying to be sold here.
for more information go here:
fido.asic.gov.au/fido/fido.nsf/byheadline/Line+of+credit+mortgages?openDocument