Mortgage reduction and debt consolidation
Refinancing of existing mortgages and the consolidation of debts can be quite advantageous to borrowers in the right circumstances. However, it has come to Consumer Protection's attention that some mortgage reduction or debt consolidation programs presently being promoted to the public may have the potential to place borrowers in a worse financial position.
Of concern to the Commissioner are those mortgage reduction or debt consolidation schemes that may place undue emphasis on the arrangement of a new loan where a borrower could significantly reduce the term of their existing loan and the total interest payments made, by adopting a revised budget and making greater monthly payments on their existing loans. Brokers are reminded of their obligation under the Code of Conduct to always act in the best interests of their principal.
Persons who have borrowed funds for personal purposes (as opposed to business or investment purposes) should be aware that if they are experiencing financial trouble due to an unexpected or temporary event, such as the loss of a job or illness, the Consumer Credit Code provides that they may be able to have their contract changed so that they can better meet repayments. Under the Code a court can also order changes to a contract if it is considered unjust.
Borrowers should also be aware that they can contact the Financial Counsellors Resource Project on 9221 9411 to locate a financial counsellor who can provide free budgeting advice as well as further assistance to borrowers experiencing difficulty in meeting loan repayments.
The potential for borrowers to be placed in a worse financial situation in the process of refinancing can arise as a result of the various fees and costs that may be incurred thereby increasing the principal amount owed. It is important to remember that, if these fees are added to the loan balance, the fees can also incur significant interest over the term of a loan .
Borrowers are therefore reminded to look at the total cost of a new loan, including stamp duty, application fees, establishment fees, and the lender's mortgage insurance. As finance brokers are generally paid a commission by the lender, there is generally no direct charge to borrowers when using a finance broker to negotiate or arrange a loan. Licensed finance brokers must also disclose in writing the amount and terms of the commission and this commission is capped by a maximum scale of remuneration.
Borrowers considering refinancing an existing loan are also reminded to shop around as there are a variety of loan products available on the market.
Borrowers and brokers alike should be aware that persons providing mortgage reduction services in association with the negotiation or arrangement of loans are required to be licensed as a finance broker. Licensed finance brokers are required to abide by both a Code of Conduct and a maximum scale of remuneration published in the Government Gazette. Moreover, persons engaged in unlicensed finance broking activity are not eligible to receive payment in respect of their services in that capacity.
Information on the Consumer Credit Code and handy credit tips borrowers are available elsewhere on this website..
The Australian Securities and Investments Commission also has a website that provides advice regarding credit and borrowing money.