Bank mortgage lacks disclosure around what the customer is borrowing. When you apply for a “loan”, does the bank officer explain how the banking system works? So that you fully understand, particularly with loans and mortgages, what you are “borrowing”?

The bank’s “loans officer” may explain that if you qualify, the bank will “lend” you money to purchase a home or another asset. What they don’t reveal is that the bank doesn’t have enough cash to “lend” you. So, instead, the bank creates “credit” based on your promise to repay.

In effect, you sign an “I Owe You,” (I.O.U.) so the bank can “lend” you money. And it’s based on (the risk around) your promise that you’ll honour the commitment, being the I.O.U note.

In by-gone days, before electronics and computerised systems, financial records were kept in “ledgers.” Hand written books, recording the income and expenses, or “debits” and “credits”. Hence “bookkeepers” would handle the accounting side of a business, which also includes banks.

Anyone with a basic knowledge of traditional bookkeeping understands the term “double entry” bookkeeping. It’s also known as double-entry accounting. This method of bookkeeping relies on a two-sided accounting entry to maintain financial information. As wikipedia explains:

The double-entry system has two equal and corresponding sides, known as debit and credit. This is based on the fundamental accounting principle that for every debit, there must be an equal and opposite credit. A transaction in double-entry bookkeeping always affects at least two accounts. It always includes at least one debit and one credit. And it always has total debits and total credits that are equal. The purpose of double-entry bookkeeping is to allow the detection of financial errors and fraud.

Smoke And Mirrors

So when you apply for a “loan”, the bank takes your I.O.U. on the “credit” side of the ledger. Now, to balance the ledger, they take the “debit” side, which becomes your “loan.”

This creation of money through credit doesn’t involve the bank giving you actual cash. This “smoke and mirrors illusion” is all about creating digital money or credit entries in your account. The bank is essentially “lending” money that didn’t exist before, and this process is governed by “fractional reserve banking”.

The bank’s role in “creating money” through credit and fractional reserve banking is rarely discussed in detail with customers.

True Nature of Bank Mortgage

The terms “home loan” and “loan account” suggest a traditional exchange of funds, where the bank lends you actual money it already possesses. But this isn’t what happens in practice. If consumers fully understood that the bank was creating the money they “borrow,” they might approach loans and mortgages with a different mindset.

Missed Opportunity for Informed Consent

Does the average person truly understand what they’re entering into when they sign a loan or mortgage agreement? The bank mortgage lacks full disclosure, and they should be made aware of the following:

  • The bank’s not “giving” you its own money. It’s not “lending” any money, it’s creating credit or digital money that didn’t exist before. [so where’s the bank’s risk?]
  • The “money” you “borrow” isn’t the same as “money” saved by depositors or accumulated by the bank.
  • You’re essentially taking on debt [that cost the bank nothing]. And you agree to “re-pay” the figure [with interest added] over time. This is the system that global banks operate.

Many people sign up for mortgages or “loans” without any knowledge of this information. Not fully understanding the mechanics behind the transaction raises questions about whether true informed consent is being provided.

Illusion of “Ownership”

Here’s another common misconception when taking out a mortgage:

That you own the property outright once you’ve made your final payment. However,  the bank technically retains a lien (a legal claim) on the property until you ask them to remove it. This fact isn’t always clearly explained when the contract is first presented. And this leads many to believe they have full ownership when they don’t. This kind of partial ownership is rarely made explicit at the time of signing.

Terms and Conditions

Another issue is that many people don’t fully read or understand the fine print in their loan agreements. The way these contracts are structured often obscures important details, such as:

  • The true nature of the loan’s creation.
  • Also the [unequal] risks involved for both parties. Banks have no risk, only potential loss of future earnings, (that’s a risk for every business).
  • And the implications of interest rates and repayment schedules.

This lack of full disclosure influences the decision making process. And makes it harder for individuals to fully grasp the long-term financial obligations into which they are entering.

Bank Mortgage Lacks Full Disclosure

In short, full disclosure about the nature of “loans” and mortgages rarely happens. Especially regarding the creation of money through credit. The banking system relies on “complex processes” like fractional reserve banking and credit creation.

This lack of transparency can create a situation where borrowers don’t fully understand the dynamics at play in their financial agreements. Knowing this information might lead to different decisions. For instance, why should the interest rate on the created “money” vary? And what “equal consideration” is the bank pledging at time of contract? [Read more about this in other articles]

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