Mortgage Acceleration - Promoters

Promoters

Promoters can profit from the sale of software, providing “monitoring” or “support”, or from commissions from referrals to lenders. Examples are usually presented that show huge savings on the mortgage. These examples may be based on the borrower’s estimate of their regular expenditure, or on an “example” family. An underestimate of real expenditure (by the promoter or the borrower) leaves additional amounts in the mortgage (or related account) in the example, and the example therefore shows significant savings. However, the presentations represent that the savings are primarily due to the type of loan account and the way it is being used.

In theory, savings could be made by leaving funds that would otherwise be in a transaction or check account for bills and living expenses, in a mortgage or related account. For example, if a borrower had an average of $4,000 sitting in a check account, leaving this in their mortgage or related account could save about $280 per year on a 7% mortgage - or less than $6 per week.

Even $6 per week can make a difference to a mortgage in the long term, but there are almost always some costs involved in setting up the “program” and these will usually exceed the savings. Costs may include fees and interest incurred in relation to a separate line of credit loan, or in refinancing a mortgage. Interest and/or monthly fees on the new mortgage may be higher than on the old mortgage. The cost of software to “monitor” the program, or fees paid to set the program up will also reduce the meager savings that can be made.

While some promoters refer to the Australian experience, this type of marketing has all but ceased in Australia since the Australian regulator, the Australian Securities and Investments Commission (ASIC) took action to stop a range of brokers and software developers from making the above representations.

One such program points out the fact that people hold cash for emergencies and day-to-day spending in accounts that earn smaller returns. Why do they do this? This is done because immediate access to cash is needed: consumers are paying an Opportunity Cost to have the cash close at hand. A HELOC can provide similar flexibility since you can pull from a HELOC on-demand as if it were a checking account. Thus, you can actually take the cash you have on-hand and pay down your first mortgage, then draw from you HELOC when you need cash. This generally produces a better return, but it depends on your rates: In the US, mortgage and HELOC interest paid is tax deductible (be careful of Alternative Minimum Tax), whereas interest the bank pays you from a savings account is taxable. For example, if you're in a 25% tax bracket and have a HELOC tied to prime + 1 (=6%) the effective interest you pay to the bank is 4.5%. On the other hand, if you're earning 4% on your savings account, your effective yield is 3% because you have to pay 25% of that yield to the government. The return is a full 4.5% from any cash you divert away from checking. Thus, and cash you put toward your HELOC or first mortgage rather than checking/savings will net you a 1.5% advantage. However, there are a few ways this can backfire:

1) the bank may freeze your line of credit (this has been happening since the Credit Crunch) 2) you may become subject to Alternative Minimum Tax 3) the benefit will change based on your income tax rate, savings rate, checking rate, mortgage rate, and HELOC rate (which is generally tied to Prime)