Issue Date:  -  Thursday, 28 June 2001

'Wrap-around' mortgages a bad deal for home-buyers

The Ministry of Fair Trading said today it was concerned about a new form of private real estate transaction that leaves home-buyers exposed to significant financial risk.

'Wrap-around' mortgages occur when a purchaser buys a property using a mortgage from a financial institution, then enters into a credit arrangement with a second purchaser, who is often unable to obtain finance from a financial institution.

The property is 'on-sold' at a higher price, with the second buyer charged a higher interest rate than is being paid by the first purchaser on his/her mortgage.

The "wrapper" uses the repayments from the second purchaser to pay off his or her existing mortgage with their financial institution. The "wrapper" retains the property title until the final payment is made, years later.

Fair Trading Commissioner Patrick Walker said the Ministry was examining three recent cases of wrapping in Western Australia, which followed a model promoted at 'wealth-creation' seminars.

"Basically, the problem with 'wrapping' is that it revolves around people using others to make the payments on an investment property for themselves, as a source of additional income," Mr Walker said.

Real estate agents were not involved in the three cases and there were no apparent breaches of real estate laws, but the Ministry was looking at offences under consumer credit legislation, he said.

"However, my greater concern is that wrapping can be used to take advantage of people who are desperate to buy, have little financial acumen or are a credit risk and therefore unable to obtain finance through reputable lenders."

Mr Walker stressed that 'wrap-around' mortgages had their origin in the United States but were not widespread in WA.

"If either party defaults on the payments, the end-buyer has no equity in the property and no certificate of title, compared with the original purchaser whose name appears on the title and who may on-sell the property again," he said.

"Furthermore, if the 'wrapper' defaults on the mortgage or goes bankrupt, the end-buyer is unlikely to receive any of the proceeds unless there has been strong capital growth over and above the outstanding mortgage that can be realised at a mortgagee sale."

Mr Walker said the Ministry would include warnings in education material for consumers.