Do you want a 100% loan?

Graeme Salt

Is it right that you should be able to buy a property without having shown any savings?


 


Can you cope with the interest repayments when the loan is the same size as the house’s value?


 


A trade publication for the mortgage broking industry recently postulated that there would be a return to 100% mortgages. This is not something that we have seen since before the GFC. Excessive debt, particularly in the US, was one of the factors that caused the GFC; people who could not afford home loans were given mortgages under the impression that property values would keep going up-an-up and so - even if someone could not afford the home loan, they could always sell for a profit.


 


But is the mooted return of 100% home loans a good idea and how can we avoid the problems of the past?


 


The broking industry’s response to the return of 100% loans has been mixed. They noted that: In Australia, there were few defaults on such loans For the most part, the banks were particularly demanding in their assessments of people’s abilities to repay loans.  


 


Many thought that 100% loans were irresponsible Some said, point blank, that they would not write such loans.


 


Personally, I am in two minds about such a development. My big concern is that, occasionally I get calls from people looking for 100% loans, invariably these people have demonstrated an inability to save despite the fact that they could have done so – often their enquiry is tinged with a touch of desperation.


 


However, on the positive side, we live in a completely different regulatory environment now. The advent of the National Consumer Credit Protection Act (NCCP) means that brokers and lenders need to pay much more attention to the client’s ability to repay the debt. In which case, there may be circumstances that a 100% loan would be suitable for someone with a high income yet no savings.


 


And, as one broker pointed out, we already arrange loans for 95% of the value of a property – the difference with a 100% loan is surely arbitrary?


 


But, for a 100% loan, I would have to be 100% sure that the loan was 100% suitable.