I have noticed that there are more and more banks and financial institutions offering loans of 100% or more for the purchase of residential property. They even capitalize the fees, or add the fees on in other words, to the loan and you still get the First Home Owners Grant.

All very nice and fuzzy! Ideal if you have not saved any money, you get a house and you now have a loan for a house. The only trouble is what are you going to do with the $7000 from the government? Hopefully your answer is to pay the loan down and reduce the amount owing and the years remaining on the loan.

Now before you go running down to the banks and brokers you should exercise some caution before you get going with this style of lending. You need to know that 100% of the value one day may drop to 90% the next year, and then you have a shortfall. Share-traders who borrow money for investing know what a Margin Call is and that is very similar to what the banks may do in the event that their loan to you is now more than what the property is worth.

I can only imagine sleepless nights and a few arguments from mums and dads regarding the fact that they now owe more than what their new purchase is worth.

The problems in this shortfall situation really lies with the banks for a few reasons:

1. What do they now do with their loan debt to you? Ask you to sell to recoup what they can get now?
2. Do they ask you to make extra repayments over and above what you already pay? They lent you this money and now it is so highly leveraged and falling backwards, that they must be making a loss keeping you paying their loans. They may not even know the property has lost value if there is no real need for them to look, but if you fall short, they may make an estimate and discuss your options with them.

I do understand that there is a business for this kind of lending, perhaps it should be for investors that know what they are doing and have proved themselves to be business like in their actions rather than emotional in their investing.

The current rates reflect an interest rate of 2% above what the standard variable rate might be. There are massive fees capitalised onto the loan, like the insurance the banks use to ‘insure’ their risk of this lending to you. There will also be stamp duty and other fees included to your new loan balance. Already, before you have even made any repayments, you are paying interest on the fees and charges and this has got to worry you.

Normal lending criteria applies to ensure you are a suitable lend in this scenario. They also like to see you earn enough, save enough, live within your means and that you do not owe anything. They like to know you are going to pay on time EVERY time and that you will be a good risk for them.

The fact remains that home ownership is not for everyone. I estimate that 30% of Australians will never know what its like to have or even be eligible for a house of their own. So why put people at risk of serious financial hardships just to make money? I love the banks, but find it hard to give any kudos to this hard line lending. Its almost like loan sharking.

The banks know that a certain part of their business is to recoup the losses made by people failing to repay their mortgage. They do not like to have to quietly sell the house you have defaulted on, but will do so to recoup losses they have.

I like investment loans of 100% or more, as it enables a high rate of leverage, but unfortunately there are very few banks willing to do these without other property security.

Don Christie

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