No More No Deposit Home Loans
No deposit home loans for now are going to be a thing of the past, or at the very least it will become increasingly difficult for prospective home to secure funding on a no deposit basis, if not outright impossible.
The global credit crisis has put a microscope under retail and traditional bank lending practices and products. Banks who in the past in their thirst for market share and increased profits coupled with an era of cheap credit often waived prudent lending practices of requiring borrowers to stump up down payments for the homes they buy.
Aussie Home Loans boss John Symond says the change signals a return to sensible lending practices, and told ABC Radio in an interview “Banks have got to have prudent lending People buying home in Australia with little or no deposit is flawed process.”
No Money Free Honey
Last month some lenders came in for heavy doses of criticism, when they began marketing campaigns aimed at first home buyers urging them to use their grant as their deposit immediately after the government increased the first home owners grant, mortgage lender RAMS began taking full page advertisements titled “No Deposit? No Worries”
As part of a fiscal stimulus package, designed to support the property market the Government increased the first home owners grant to $14,000 for established homes and $21,000 for new houses.
Consumer advocacy were incandescent by the marketing strategy. The advertising campaign by RAMS in mid October was labelled purely irresponsible by the Consumer Credit Legal Centre principal solicitor Katherine Lane .
Miss Lane told the Daily Telegraph back in October that mortgage lenders should be erring on the side of caution instead of preying on prospective home owners who have no savings. ” I think this is the worst case of denial that I’ve ever seen,” she said.
“The bottom line is, there needs to be care taken at the moment given the current situation, and just because you get an extra lot of money doesn’t mean you don’t need to take care and ensure you can afford the loan. Unfortunately, lenders do irresponsible stuff like this all the time.”
The Hole We Are In
RAMS issued a statement back in October when it first began the campaign saying that it was not behaving irresponsibly and that the campaign was not aimed at enticing customers into low-doc loans. A spokesperson said “We have responsible lending practices and while that marketing is there, we still have all the checks and balances to make sure the person is right to get that loan,”
Irresponsible lending practices, making loans to people who could not afford them, depending on rising property values and offering products to borrowers with lax requirements is ultimately why we are experiencing a seizing up of our credit system and why the western world is more than likely going to experience a recession that will be deep and potentially nasty, requiring economies to restructure entirely.
In some respects the events of the past couple of years can be viewed as a good thing, because it will force a return back to economies which run on prudent lending, where banks make loans only to companies or individuals who can afford, it.
Excess that was built into the system largely as a result of much of the innovations that have occurred in modern finance over the last two decades will be eliminated. In the short run moral hazard, that is firms or individuals behaving irresponsibly because they know there is someone else to pick up the pieces will be minimised as tax payers demand prudence during the term of their loans. Though over the long run government bail outs of lenders that are deemed to large to fail is a problem and needs to be addressed. How to do that however is the 700 billion dollar question however.
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The present crisis has lead to a decrease in the number of no deposit home loans.The meltdown is having an iron grip over the economy.