Protecting wealth - Australian Securities and Investments Commission

Protecting wealth
Protecting the equity in your home

Don't become a victim of equity stripping
What are your options in financial difficulty?
Key tips if you are in financial difficulty with your home loan
How to avoid fringe brokers and lenders

For many Australians, their home is their biggest asset and their home loan is their biggest financial commitment. Most people also have strong emotional ties to their home.

If you get into difficulties managing the repayments on your home loan, chances are you'll try anything to avoid selling up, including options like refinancing your loan.

Some brokers even use adverts and slogans designed to grab your attention if you are in a situation of mortgage stress. But it's essential to do your homework before you commit to a new finance arrangement, otherwise you could end up in an even worse situation, as shown in the ASIC report Protecting wealth in the family home.

This report looked at home loan refinances arranged by brokers for borrowers in financial difficulty. 3 borrowers refinances were examined in detail. For those 3 borrowers, refinancing cost them on average:

27% of the equity accumulated in their home; and,
a minimum of $20,120 in fees and charges.

If you are in mortgage stress it's essential to consider all your options. Make sure you make the best decision for you and your family in the long term.

Don't become a victim of equity stripping
Equity stripping is a practice where unscrupulous operators, especially fringe brokers, take advantage of borrowers in difficulty and exploit their desire to save their home by:

Charging high fees, sometimes more than 20% of the equity in the home; and
Arrange for a refinancing arrangement where it is extremely unlikely the borrower will be able to afford the new repayments.

Equity is the proportion of your property that you own outright.

If there is no mortgage outstanding on a property in your name, you own 100% of the equity. If you sold the property, all the sale proceeds would belong to you.
If you owe $100,000 on your mortgage and your home is worth $200,000, you own 50% of the equity. If you sold the property, half the sale proceeds ($100,000) would belong to you and half would go to repay your mortgage.

If you do refinance, but can’t afford the new repayments you may end up being forced to sell anyway, but there will be less equity left to repay your debts and make a new start.

FIDO has more on switching home loans:

The 1-page Checklist for borrowers helps you work out the equity you have in your home now and if you sold in in different situations, and also has questions to ask the broker.
The home loan switching checklist helps you work out what you want from your home loan, how much it would cost to switch, and how to compare home loans.

What are your options in financial difficulty?
If you are in a situation of mortgage stress, address the situation by focussing on concrete issues:

Are your financial difficulties temporary or continuing? This may determine whether you need to negotiate a short or long-term change in repayments.
Do you need to arrange a significant reduction in repayments from the current level?

List all the options, even if some of them are unpalatable right now. These options may include:

Negotiating with your existing lender for temporary relief;
Examining all alternative loan options available, and the merits and disadvantages of each option;
‘Downsizing’ by moving to a less expensive property; or
Selling your home, for as large a lump sum as possible. Using the cash to repay your debt and investing the rest at low risk in the hope that you will be able to buy another home in the future.

Key tips if you are in financial difficulty with your home loan

1	If you are behind on your home loan seek help as soon as possible—the sooner you act the easier it will be to try and come to some arrangement with your existing lender. Don’t be afraid to ask your lender if the repayments can be lowered. If they say no, ask for the decision to be reviewed by someone more senior.
2	Consider approaching a financial counsellor, community legal centre or legal aid to negotiate with your lenders or get legal advice.
3	Seek as much information as you can and try to make objective and informed decisions. Use FIDO's budget planner to test whether refinancing is likely to be in your interests.
4	Be realistic about whether you can afford repayments under a new refinancing arrangement if you are already in default or under financial stress.
5	Seriously consider making the tough decision to sell your home or downsize now rather than tapping into your equity in an attempt to keep your home. If you don’t you could find yourself still having to sell in 6 or 12 months time but getting less money in your hand because of additional fees and interest due to an expensive refinance.
6	Complain if things go wrong. If your broker or lender is a member of an External Dispute Resolution scheme approved by ASIC (e.g. Credit Ombudsman Service Ltd or Banking and Financial Services Ombudsman), then that service may be able to hear your complaint.
7	Use the Checklist for borrowers and home loan switching checklist to weigh up your options.

Most importantly – remember that there are no easy solutions
Avoid brokers who make unrealistic promises about getting you out of debt or who use advertisements claiming they can help no matter how desperate your financial situation is.

How to avoid fringe brokers and lenders
If you decide that refinancing is the right solution for you, avoid fringe brokers and lenders who offer simple solutions or make unrealistic promises.

1	Check that the broker and the lender you are dealing with are members of an External Dispute Resolution scheme approved by ASIC (eg Credit Ombudsman Service Ltd or Banking and Financial Services Ombudsman). This will make it easier to obtain a remedy if things go wrong.
	TIP	Check with the EDR scheme itself rather than relying on oral statements by a broker or lender. See our information on financial services complaints schemes and guide to EDR schemes.
2	Be wary of advertisements or statements by the broker that say they can help no matter how desperate your financial situation is.
3	Look for signals in broker behaviour that suggest the transaction is risky. Walk away if the broker: asks you to sign blank documents asks you to sign application forms with information that is false refuses to discuss repayments with you before asking you to sign up arranges a loan without discussing your financial situation in detail, or what repayments you can afford says the loan must be recorded as being for business purposes, when this is not true asks you to obtain an Australian Business Number for the loan when you are not self-employed or do not need one rushes you to make decisions or rushes the transaction refuses to put all loan costs and the interest rate in writing before you sign up refuses to give you copies of documents you have signed.