Does taking out a 100% home loan leave you vulnerable to the risk of owing more than your property is worth? Last month property prices in the capital cities dropped by up to 0.3% and some economists tip falls of 10% over the coming months.
Consumer protection and welfare groups are concerned that the big four banks - Commonwealth Bank, ANZ, NAB and Westpac - are still lending 100% of the purchase price of a property. You could be slugged a 3% mortgage insurance however. St George are lending 100%, including insurance. However banks defend the practice saying there is a very low default rate.
David Imber from the Victorian Council of Social Service, sees these loans as targeting the most vulnerable of borrowers.
"If we're seeing people borrowing 100% of the price of a property in an unstable market, it's reasonable to conceive that we could be seeing more people in negative equity," he said.
Outer suburbs are at most risk of negative equity, which occurs if the value of the house is less than the amount borrowed on the property. In other markets, Recent data from the USA and UK show a massive increase in negative equity occurrences in the past year resulting from a dramatic fall in house prices, with as many as a third of US householders predicted to fall into negative equity.
Traditionally, borrowers need around 10% of the purchase prices to take out a mortgage however, most lenders offer no deposit home loans which allow the borrower to borrow 100% of the purchase price. This means they are borrowing more, paying more in interest, and must be careful not to fall into negative equity. Mortgage insurance fees can also add financial strain to the borrower.
Consumer groups are now warning that these types of loans can leave some borrowers in difficult financial positions.
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