Case study equity stripping

Ben and Tina lose their home

""Ben and Tina bought a home worth $530,000. Ben was self-employed and when business slowed they found they could not meet their home loan repayments.

Ben and Tina decided to refinance their loan using a broker who advertised in their local paper. The broker advised them to switch to a loan with higher repayments and a higher interest rate than their existing loan. He advised them of this even though Ben and Tina had defaulted on their existing loan and clearly did not have the capacity to pay the new loan. What they really needed was a loan with repayments that were lower than what they were already paying.

The broker charged them a total of $20,120 in fees to refinance. They found out later that if they had approached a mainstream lender such as a bank, they would have paid only $670.

To pay the broker, Ben and Tina had to draw down the equity in their home. Before they refinanced, they owned 15.1% of the equity in their home. After refinancing, they only owned 11.4%. They lost 24.3% of the equity they previously held, or almost $19,500.

To make things worse, the high broker fees and further charges by the lender increased the amount that had to be borrowed, which in turn increased the repayments.

A year after they refinanced, Ben and Tina were forced to sell their family home. Not only had they lost significant equity, it had cost them more than $20,000 along the way. They would have been better off making the tough decision to sell their home a year earlier.

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Last updated: 13 Oct 2016