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Mortgage payment guides are useful tools for buyers but beware their oversimplification, writes John Kavanagh.

The government’s latest initiative to help consumers make better-informed decisions when they are shopping for a home loan – the requirement for lenders to provide a key-facts sheet – kicked off at the start of the year, with industry groups debating the value of the new measure.

The Credit Ombudsman Service says borrowers need to take care when using key-facts sheets because it is not possible to calculate in advance the total cost of a home loan with any degree of confidence. The consumer group Choice says key-facts sheets are not a ”silver bullet” but are a useful service that will allow people to make product comparisons more easily.

Since January 1, lenders have been required to give home-loan borrowers a key-facts sheet. The idea is to provide information about the loan in a standard format, so it is easier for borrowers to compare loans and shop around.

The information that must be presented in a key-facts sheet includes the repayment method, the frequency of repayments, the interest rate and the comparison rate (see box).

The key-facts sheet will also provide an estimated cost of the loan – the total amount to be paid back over the life of the loan. key-facts sheets will not be available for borrowers applying for a commercial loan or for a top-up of an existing loan.

At the time the initiative was announced, the Treasurer, Wayne Swan, said: ”It will mean less wading through paperwork and spending hours talking to different lenders to find out basic details families need to compare loans. We’re putting the power back in the hands of consumers.”

However, in a submission to Treasury in April last year, the Credit Ombudsman Service said: ”The actual total cost of a long-term loan such as a typical Australian home loan cannot be determined until the credit contract comes to an end.

”The cost will depend on a myriad of things, including the actions of the borrower and the lender and also on external events, such as economic conditions, competition, changes in the market, regulation and so on.

”All of these are impossible to predict, particularly given that home-loan terms can be as long as 25 to 30 years. We question whether there is any practical value for home-loan borrowers in having predictions about total cost in the key-facts sheet.

”Using estimates of total cost as the basis for comparing and choosing between different home loans will be unreliable and even possibly dangerous.

”If key-facts sheets had been available in 2007, it is likely that they would have shown that non-bank loans would be cheaper. In many cases the opposite is now the case.”

The head of campaigns at Choice, Matt Levey, says there are two big barriers that stop people switching home loans and other financial products: the perception that it is too hard; and the fear that switching will not improve their financial position.

”A key-facts sheet is not going to determine the loan they choose but it is going to make product comparison easier,” Levey says. ”As long as people recognise that there are other issues to consider, the key-facts sheet is a powerful tool.”

What is in a key-facts sheet

Since January 1, lenders have been required to give home-loan borrowers a key-facts sheet. The information that must be in the document includes:

???????????????????????? Repayment method, such as principal and interest or interest only; the frequency of repayments (usually monthly or fortnightly); the interest rate; and the comparison rate.

???????????????????????? The term of the loan and the interest type (variable or fixed) must be included.

???????????????????????? The key-facts sheet will provide an estimated cost of the loan – the total amount to be paid back during the life of the loan. For example, a $395,000 loan with a 30-year term and a rate of 7.16 per cent will cost a total of $963,843, or $2.44 for every dollar borrowed.

???????????????????????? Other information on a key-facts sheet includes the amount of any establishment fee, monthly fees and the impact of interest-rate changes on monthly repayments.

???????????????????????? It also shows borrowers the impact of making higher repayments.


Posted by John Kavanagh – The Age on 25th January, 2012