Online loan calculators removed after ASIC intervention
ASIC said the calculator software, produced by Infochoice.com.au, was used by over 100 lenders, broker groups, banks, and credit unions in Australia.
The loan calculators produced a graph, comparing the time taken to pay off a standard loan with the time taken using a line of credit. The calculator suggests that using a line of credit will result in the consumer paying off their home loan more quickly.
Line of credit mortgages are generally interest-only loans with no set term for the loan to be repaid, which gives the borrower the freedom to choose when they will make payments on the principal.
The way the calculator was designed meant that extra repayments were credited to the line of credit but not to the standard loan and the line of credit was at the same interest rate as the home loan.
These assumptions, however, were not made clear to the consumer, so that the calculator showed that the line of credit was paid off more quickly than the home loan, but it was not clearly stated that this was due to higher repayments by the borrower.
"Most lines of credit charge higher interest rates than standard home loans, so when you stop to think about it, it was extraordinary to suggest that paying higher interest could pay off a loan sooner", said Greg Tanzer, ASIC's executive director of consumer protection and international relations.
Many finance brokers promote the use of lines of credit as part of "debt reduction" schemes which encourages borrowers to refinance to a line of credit with calculations, charts or graphs showing the balance of the line of credit reducing more quickly than the consumer's existing loan.
However, ASIC said, these calculations or charts may result in exaggerated claims about the amount of money consumers can save, where the broker makes unrealistic assumptions about the capacity of the borrower to make additional repayments.
"If financial institutions try to sell loans to consumers, such as lines of credit, through flawed comparisons, consumers may be misled into believing that there is something special about lines of credit which mean that you will own your own home sooner. That's not true," Tanzer said.
Tanzer added that the only way to pay off a loan sooner is by moving to a loan with a cheaper interest rate or by making extra repayments.
"In fact, if you can afford to make extra repayments you will probably save just as much by making those payments on your existing loan, and you can avoid extra costs, such as early repayment penalties and application fees, by not refinancing," Tanzer said.
Infochoice today clarified that ASIC has made "no order nor official request to Infochoice for it to disable its line of credit calculator" after the regulator expressed its concerns about the loans and Web calculators.
A statement from the independent 'infomediary' company said that they made the decision last week to voluntarily withdraw the calculator from distribution after ASIC first raised its concerns.
The company will continue working with ASIC to address their concerns in a new version of the line of credit calculator.
Infochoice emphasised they have always said that line of credit loans need to be used in a disciplined way for financial savings to accrue and that any savings in interest do not occur automatically.
Infochoice general manager Denis Orrock said that a line of credit loan only works for borrowers who are in a position to contribute excess income to their loan.
Tanzer commended the quick action taken by infochoice.com.au after ASIC raised the issue with the company.
"'infochoice.com.au acted quickly to take down the calculators from over 100 Web sites once ASIC raised these concerns with it. ASIC acknowledges the company took a co-operative and responsible approach that will benefit consumers," Tanzer said.