I have had a ton of fun researching the United First Financial “program” being sold for $3,500 by multi-level marketing people. The more I read, the more it’s clear that this is a bad way to spend $3,500.

Apparently, telling consumers that it was based on the “Australian banking system” is intended to give it some credibility. That somehow, since “it” is used in a land far away and this awesome company UFF is offering it to us in the United States is supposed to make it better.

Wrong!

Apparently all is not well in Australia. Carolyn Bond, CEO of the Consumer Action Law Center in Melbourne, Australia says:

US promoters are correct to say that this program was sold in Australia before it was “discovered” by US borrowers. However consumer organisations such as ours, and our national financial services regulator – Australian Securities and Investments Commission (ASIC) – concluded years ago that there were no savings to be made, and that promoters were engaged in unlawful conduct.

Examples and charts showing massive savings have all been shown to include significant increases in payments being made to the mortgage (in addition to the funds deposited temporarily).

Any savings made by depositing regular salary into the LOC amount to possibly a few hundred dollars per year, and unless the borrower has significant funds to deposit, these savings are less than the additional interest paid on the LOC – even if the LOC is quite small (say $50,000). Borrowers who pay any money for software, monitoring or other services, are often thousands of dollars worse off.

An organization in Australia called Consumer Credit Legal Service prepared a report on “debt reduction plans” which are what United First Financial has based their program on. There were some details of the problems with the programs in the report:

The Consumer Advisory Panel of the Australian Securities and Investments Commission (ASIC) funded Consumer Credit Legal Service to produce a “case study” report for ASIC on “debt reduction” plans. This report was provided to ASIC in March 2004.

[snip]

Terms such as “mortgage reduction” or “mortgage minimisation” are commonly used by some in the finance sector. While there is no clear definition of these terms, our casework suggests that they refer to a financial plan that involves:
1. Refinancing of a mortgage (usually with a line-of-credit);
2. Paying salary(ies) into the line-of-credit;
3. Increasing payments on the mortgage (whether this is drawn to the borrower’s attention or not); and
4. In some cases, consolidation of other debts.

[snip]

The Line of Credit Hoax
True or False?
You can cut years off your mortgage – and save thousands of dollars if you:

• Refinance your traditional mortgage loan to a line-of-credit;
• have your salary paid directly into that account;
• use a credit card for expenses, with that account paid monthly from the line-of-credit.

In fact, most borrowers – even those on high incomes – would pay more by using this system!

This urban legend, fanned by misleading marketing – and to some extent by unthinking support from generally reputable sources – is really a hoax.

The idea derives from a degree of logic. Standard mortgage loans have regular monthly payments of interest and principal, struck to repay the loan over a longer term of, say, 25 years.

Interest on most mortgage loans is calculated each day on the outstanding balance. Therefore, the more money that is paid into the mortgage (even if it is left in for a short time) the lower the interest charged. It follows, according to promoters, that if your income is paid into your mortgage and left there as long as possible (by using an interest free credit card for expenses) you can reduce the term of your mortgage.

The truth is, the amount saved by this method is very small, and in most cases is far less than the additional costs of the type of mortgage required (offset account or line of credit mortgage).

As an example, Choice Magazine found that a couple with an average of $14,000 savings and a $268,000 home loan were $830 worse off over a twelve month period with an off-set account, and would have been better off with a “no frills” mortgage. The difference between the fee and interest expense on the “no frills” mortgage, compared to the mortgage with off-set, were more than any interest savings made by keeping an average of $14,000 in the off-set account. This example did not assume that the couple had refinanced – as many borrowers do. Refinancing costs would have seen the couple even worse off.

Mortgage offset accounts are deposit accounts linked to a mortgage loan. Rather than earning credit interest on funds held in the offset account, the interest due on the loan is reduced as if the offset funds had been paid to the mortgage.

[snip]

Misleading Marketing
The promotion of line-of-credit mortgages (or off-set accounts) ranges from slightly confusing messages to downright misleading and deceptive conduct.

It is common for marketers to compare a standard 25-year home loan with a line-of-credit mortgage – both in advertising and when presenting a “scheme” or “plan” to individual borrowers. Comparitive examples provided during the marketing process assume that no additional payments are being made on the 25-year loan, but do assume that the amount being paid towards the line-of-credit mortgage is much higher.

This is not always immediately clear to consumers, however close examination of the examples, shows that even after drawing out living expenses each month, the amount remaining in the line-of-credit each month is much higher than the monthly payments on the standard home loan. It can be a complex exercise to examine these examples to identify the savings that result from increased payments and the savings (if any) resulting from use of the line-of-credit.

In most cases the borrower would be better off simply sticking to their current loan and increasing payments. There are many websites using this misleading marketing.

Looking at the calculators on these websites, it shouldn’t take most consumers very long to realise that more is being paid towards the line-of-credit mortgage than the standard loan. However, is all the “savings” due to making increased payments, or does the use of the line-of-credit itself contribute something?

It’s a bit more challenging for the consumer to establish this. It is the increased payments, rather than the product, that leads to the savings. However, it is not always easy to find this out by using the industry’s internet “tools”.

For example one calculator produced by Infochoice, has a default setting that shows over $90,000 in savings by using the line of credit (over a traditional loan). Close examination would show that the savings arise from increased payments – but the calculator doesn’t allow the user to, for example increase the payment on the standard loan and compare the two loans.

However, if monthly expenses are changed to equalize monthly payments on both loans:

• Standard loan with a 5 year term – payments $1,991.94 per month
• Monthly expenses $2,008 – (payments of $1,992 per month)

It results in a saving of just 78c!!

While some marketers mention the need for “disciplined budgeting”, few mention that you actually need to increase mortgage payments.

In fact, some claim that you can cut years off your mortgage “without making extra repayments”.

Maybe this special system used in Australia and now (lucky us) brought to the United States isn’t such a good deal after all?