Just six years after poor lending practices contributed to a global financial crisis, some high-risk borrowing strategies are back on the market to tempt those struggling to raise the deposit for a home loan, borrowers were warned this week.
Consumer advocacy group Choice advises that low-deposit loans, family guarantees and 40-year loans are financial products that make it easier to take the leap from renting to home ownership, but they can also pose significant risks.
Choice spokesperson Tom Godfrey said that during the global financial crisis people were hard pressed to get a home loan approval unless they had a significant deposit.
“Now RAMS is offering a low-deposit loan combined with a guarantee that allows you to borrow a staggering 120 per cent of the value of your home”, Godfrey said.
“Worryingly there has been a strong demand for these high-risk loans with one in three new home loan borrowers putting up less than the 20 per cent normally required.
“We are seeing products that offer family guarantees and low loan-to-value-ratio loans to consumers who don’t have a significant deposit.
“While the prospect of owning a home when you have little in the way of savings may seem appealing, if you lose your job, get sick or are unable to keep up with the repayments, it may not be long before the bank asks you to sell your house, or repossess it.
Godfrey said that getting a family member to guarantee all or part of your home might seem like a good idea for some borrowers as a way of avoiding lender’s mortgage insurance.
“However, the potential downside side risk for your family member is significant because if you are unable to make repayments on your home loan they may lose their house as well.”
For elderly parents who are no longer in the workforce and worked all their lives to finally own their home, this is a high-risk strategy and can be devastating if things go wrong.
Godfrey said that of the three strategies, 40-year loans are the riskiest.
“Taking a 40-year loan because you can’t afford monthly repayments for a 30-year loan can backfire if your interest rate goes up again”, he warned.
”The difference between a 30 and 40-year loan on a $300,000 home is $140,800 in extra interest.
“Repayments are only $4.88 per day more for a 30-year loan, the equivalent to a daily large coffee.”
Godfrey pointed out that the average interest rate for standard home loans over the last 20 years has been 7.6 per cent compared to 5.9 per cent today.
“Be prepared for rates to go up.”
He also suggested that if you are thinking about providing a family guarantee for someone, consider instead taking out an unsecured personal loan for the amount and ask them to make all or part of the repayments.
“If things go wrong, and the lender threatens to sell your house, immediately seek legal advice. If you make a complaint to the Financial Ombudsman Service or the Credit Ombudsman Service the bank has to pause the enforcement proceedings while the complaint is assessed”, he concluded.