With first homes averaging $430,000 and housing affordability at a record low, new types of loan may seem an answer to the prayers of desperate home buyers — but are they?
In this article, we take a look at these new loans:
40-year mortgage Spreading your repayments over a longer period means lower minimum repayments, but you’ll pay much more in interest.
No-deposit home loan With these loans, the typical 20% deposit (about $80,000 for a $400,000 loan) is no longer required. Some banks lend you the full amount, and specialist lenders even offer you the money for legal fees and extras as well — but this comes at a high cost.
Guarantee As an example, your parents can become guarantors and put up their home as security to enable you to get a larger loan or buy without a deposit. But if things go wrong, the bank can sell your parents’ home as well.
Shared equity mortgage You can borrow up to 20% of the value of the property without paying interest, but when you sell it you have to pay back the original loan plus up to 40% of any increase in the value.
These new loan products are much more risky than standard home loans. While they promise to make home buying more affordable, they all have traps. For example, with a no-deposit mortgage you can be in a situation where your loan is well above the value of your home for a long time, meaning you’ll still owe money if you have to sell.
All these loans can get you into serious trouble unless you fully understand the fine print and have taken the right measures to use the loan to your advantage. In fact, the mortgage contracts that apply to most home loans can put home buyers at a serious disadvantage.
Please note: this information was current as of January 2008 but is still a useful guide to today's market.
CHOICE wants fair home loan contracts
The mortgage contracts that apply to most home loans can put home buyers at a serious disadvantage.
A number of home loan contracts CHOICE reviewed gave the lender very broad rights to declare you in default of your contract. For example, one lender reserves the right to declare you in default if you lose your job or the value of your property decreases. If you are in default, the bank can ask you to repay the home loan immediately and, if you fail to do so, sell your house.
These contracts can be riddled with complex, legalistic and often outright unfair clauses. It’s unrealistic to think individual consumers could negotiate these terms with loan providers.
That’s why CHOICE has called on the Federal Government to introduce new national laws to protect consumers and ensure contracts are fair.
Have you seen a dodgy contract term? Join us in calling for new national fair contract laws.