Costly Promises
The Age
Monday January 28, 2002
How would you like a no-risk, no-cost way to dramatically reduce your mortgage repayments? Sound too good to be true? Indeed it is, but the idea has enticed several Melburnians who were convinced they could save thousands of dollars. In fact, they were entering contracts that generally levied heavy fees and ended up costing them more than they saved.
The Consumer Credit Legal Service (CCLS) has received complaints about mortgage refinancing companies, including EL Mortgage Centre. The deals offered are commonly known as mortgage-reduction programs or debt-reduction programs.
Paul Gillett, consumer advocate with the CCLS, says mortgage refinancing tends to involve large sums of money changing hands.
Mr Gillett says sometimes a broker or refinancier fails to consider what the customer can afford. "Long-term, many of these deals don't save the client money because of the brokerage fees," he says.
However, David Taylor, the Victorian manager of EL Mortgage, argues the fees are not high for the service provided. ``We charge a one-off fee, which is accrued on to (the client's) mortgage," he says. ``It's a book entry.
"The savings we promise are based on what the clients are currently paying - we don't necessarily ask them to pay more. Money management is what it's all about."
Organisations are required by law to declare all fees charged up front, but consumer advocates say those selling ``mortgage-reduction" schemes sometimes don't.
A common approach is for the sales person to run through multiple spreadsheets, which look impressive and give credibility to the proposal. Some companies refuse to leave documentation with potential customers.
The CCLS recommends reading all documents and says never sign on the first contact. Take the interest rate to your bank, or any big lender, to see if it will match it. Often the terms offered are no better than those available through conventional lenders.
Carolyn Bond, manager of the CCLS, says: ``We have assisted more than 10 consumers in relation to EL matters, and have had other clients experiencing problems with other debt-reduction companies offering very similar programs. Most consumers have got to us before they've entered into a finance agreement and all have wanted out due to the high-pressure sales tactics, an unworkable budget and miscalculation of the net financial benefit. We have also come across a couple of examples where people did proceed with the program and suffered substantial financial loss as a result."
EL's Mr Taylor refutes these suggestions: ``We go out and visit people in their homes each night and show them how they can save money and time on their mortgage.
"We use tools that the banks offer but we look at each client's situation and tailor a debt-reduction program to their needs," he says. ``We're yet to find a bank that offers any sort of management program for use of those tools."
Door-to-door salespeople offer these deals, but some appointments are made in advance through a telemarketer. A call is made to the household and a series of questions asked about income, property value, mortgage terms and whether the householder would like to significantly reduce the term of their mortgage.
Then an appointment is made, with visits around 8pm. In several instances, company representatives have not left the home until midnight and later.
"The reason we visit at around 8pm is to meet with both mum and dad," says Mr Taylor. "It takes an hour-and-a-half to run through the program. We don't go into a home unless the people have invited us in. If we are in a client's home after midnight, we ask them to sign a document saying that it's OK to be there."
Mr Taylor says EL, which is a privately owned Melbourne-based company with offices in Sydney and Brisbane, has thousands of customers nationally and has been in business for more than a decade.
"We are in a service business; we want happy customers," he says. ``We get a lot of business through referral."
In addition to the more recent complaints made to the CCLS, a complaint was lodged with Consumer and Business Affairs Victoria in relation to EL failing to comply with the Fair Trading Act. In February last year EL pleaded guilty to failing to provide a cancellation notice and was placed on a 12-month good-behaviour bond and ordered to pay costs of $1282. (A five-day ``cooling-off period" or cancellation notice is required by law in Victoria.)
A spokeswoman at Consumer Affairs says there are many companies promising to reduce the overall time and cost of a home loan, when a bank can provide the same service for hundreds, rather than thousands of dollars.
"They're rehashing what you've already got rather than offering anything new," she says. ``And they do charge fairly high fees for the privilege, $2000 to $4000."
Her concern is that customers are not necessarily made aware of their rights. Penalty fees for pulling out of the deal once an initial agreement is signed are often referred to only in very small print.
In the final analysis, anyone offered a mortgage-reduction program should be very careful. The fees vary greatly and can be as high as $6000.
One client of CCLS went to their bank the day after an offer from EL and was told the bank could provide the same deal for $400 and not the $4000 fee wanted by EL.
Mortgage-reduction plans are generally based on a line of credit and paying most expenses by credit card. Max Newnham, an accountant and principal of Taxbiz Australia, says such a program requires a lot of discipline to work.
"If a strict budget is not followed, people can end up with a much larger mortgage than they started with, instead of paying off their original loan more quickly," he says. ``The legal principle of `let the buyer beware' has never been more applicable."
If the company offering the program wants you to sign on the spot and will not let you get the program or documentation checked out, do not sign anything. Check the legality and legitimacy of any finance related documents with either an accountant or a financial planner.
Case of confusion
One Belgrave couple, attracted to the idea of reducing their mortgage, invited a representative of mortgage-reduction group EL Mortgage into their home. However, when Tony and Jenny Ray (above) realised they were going to be charged fees as high as $5950 to refinance their $70,000 mortgage, and that their repayments were going to rise by $500 a month, they went looking for help elsewhere.
Tony Ray's introduction to EL Mortgage was through a telephone call, when he was asked a series of questions that he thought were part of a survey. At the end of the call, a time and date for an EL representative to visit was arranged. The representative arrived at 9pm. After three hours, Jenny and Tony had signed a contract with EL for the preparation of a debt-reduction program. The couple was left with the impression that they would be able to use their savings account to pay for their expenses, would not have to use a credit card, their loan repayments would not increase and that EL did not earn commissions from the finance institution providing the funding.
On the second visit, this time by a different EL representative, they were told that, for the plan to work, a credit card had to be used for most expenses, their loan repayments would have to increase by $500 a month and that EL did earn commissions from the bank providing the finance. Despite the assurances given by the first sales representative being repudiated, the couple signed the paperwork presented to them at the second appointment.
"The only reason I signed the final paperwork was because I thought the cooling-off period had elapsed and I felt trapped," says Tony Ray.
EL Mortgage's Victorian manager, David Taylor, argues this was an unfortunate one-off. "In the Ray scenario there had been some confusion and misunderstanding," he says, "so we refunded the deposit and there was no penalty for the client."
© 2002 The Age