Reverse Mortgages Come Under Scrutiny in Australia
MELBOURNE, Australia - Transcomm Credit Union has had its knuckles rapped by the Australian Securities and Investment Commission. Transcomm is one of 18 Australian financial institutions offering reverse mortgages to retirees. Reverse mortgages allow people to borrow money secured against their home without repaying either interest or principle until they...
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MELBOURNE, Australia – Transcomm Credit Union has had its knuckles rapped by the Australian Securities and Investment Commission. Transcomm is one of 18 Australian financial institutions offering reverse mortgages to retirees. Reverse mortgages allow people to borrow money secured against their home without repaying either interest or principle until they move or die. The interest therefore builds up. ASIC asked that Transcomm and all reverse mortgage providers review their advertising material to make sure it was neither misleading or unclear. When ASIC looked at Transcomm’s material, they found that it stated the reverse mortgage had: no impact on pension entitlements, the most competitive interest rates of any reverse mortgage, lower fees and charges, an inbuilt safety measure to guard against “runaway” or negative equity; and was designed so that the final balance owed would not exceed 50% of the estimated future value of the property. ASIC found the statements, as well as the overall message of the advertisements, to be misleading because they included false claims about the product’s impact on pension entitlements and its competitiveness, and misrepresented the extent to which consumers’ interests were protected by some of the product’s design features. Although the Transcomm product was named “Reverse Mortgage Product of the Year 2005″ by Personal Investor Magazine, ASIC found “The Annuity Plus Reverse Mortgage” allowed Transcomm to reduce the amounts advanced to borrowers and, in some circumstances, even required early repayment. Unlike other reverse mortgages, the Transcomm product was a fixed-term loan meaning consumers were likely to have to repay the loan in their lifetime, ASIC Deputy Chairman Jeremy Cooper said. “It’s also important potential borrowers are made aware that this product does not have a negative equity guarantee. Put simply, this means borrowers may eventually owe more than the value of their property. This is a good example of the need for consumers to understand the product they are considering,” Cooper said. Transcomm has been told to stop making misleading statements and place corrective advertisements on its Web site and provide current borrowers with a chance to change their loans. Those who have suffered losses may reclaim compensation and the credit union must implement a compliance program for its future advertising and legal material. To date there is no corrective advertisement on its Web site. ASIC is cautioning all consumers thinking of a reverse mortgage to get independent financial advice prior to signing any agreement and to have a lawyer check the fine print. They have a calculator on their consumer Web site FIDO (www.fido.gov.au), which lets potential borrowers see how debt can build up and affect their equity. Other financial institutions are considering offering similar products. ASIC does not want that house-rich but cash-poor seniors will end up owning more money than their home is worth. -
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