04.Brokers recommend risky asset loans
A few years back, Jane and Peter from Sydney had difficulty keeping up the repayments on their $190,000 home loan and went to a mortgage broker, asking for a reverse mortgage. The broker recommended they take out a larger loan to pay off their original one. He told them they wouldn’t have to make monthly interest payments on the new loan.
Jane and Peter thought they’d been offered a reverse mortgage. In fact it was a loan secured by their house that didn’t require documentation proving their ability to repay it — this is sometimes called asset lending.
The difference from a reverse mortgage is that you’re required to repay the asset loan (including accumulated interest) at some stage, and not just when you sell your home, die or move out. These loans are usually structured in a way that provides you with enough funds to repay existing debts.
However, with repayments built in and added to the loan amount, the loan will eventually grow and you may not have the money to pay it out when it’s finally required. Brokers may suggest people who take out one of these loans can again refinance at this point, but that strategy can only work if the value of the home has increased sufficiently — it’s very high-risk.
After taking out the recommended loan and using money for renovations and repayments, Jane and Peter now owe $350,000 and are in danger of losing their house.
Two mortgage brokers offered such a loan to CHOICE shadow shopper Larry as an alternative to a reverse mortgage. Larry is on a Centrelink pension. One broker suggested he could borrow up to 70% ($420,000) of the value of his home and use the money for investing.
CHOICE is very concerned about this practice. Asset loans are in no way similar to a reverse mortgage as they require repayment and don’t have a no negative equity guarantee. They put borrowers in danger of eventually losing their home.
Recommending such a product to borrowers who are in financial difficulty and can’t afford repayments can only be called unscrupulous. We’ve asked the Australian Securities and Investments Commission (ASIC) to investigate.
For valuable input in this story we'd like to thank:
- David Tennant, Care Inc. Financial Counselling Service
- Katherine Lane, Consumer Credit Legal Centre (NSW)