The WA Housing Centre (http://www NULL.wahousingcentre NULL.com NULL.au/)is advertising home loans to first time buyers that do not require applicants to have saved a deposit. Would-be purchasers are implored to ‘not waste time saving for a deposit.’ See ad left of text.
First of all, this carries echoes of the kind of risky lending that was widespread in the lead up to property crashes in the US and Ireland. Remember, the development of property bubbles in those countries (and others) was dependent on there being plenty of willing lenders and even more willing borrowers.
But the fundamental question is if an individual, couple or family is unable to save even a modest deposit to put towards the purchase of their first home, is it prudent to place them in a position were they will be obliged to pay a monthly mortgage payment on a loan amounting to hundreds of thousands of dollars for 25 years or more?
Also, traditionally deposits are not just sought by banks as proof of credit worthiness. When a deposit is used in the purchase of a new home it gives the buyer equity in the home. This, obviously, ceases to be true if no deposit was used in the purchase. Thus, should property prices deflate even slightly the ‘no deposit’ household will find themselves in a position of negative equity ie the outstanding value of their loan will be more than the value of the asset (house).
Defaulting on mortgage payments when the household holds significant equity in the home is one thing. But if a mortgage goes delinquent in a negative equity situation, households are left in a situation where even selling the house will not cover the cost of the outstanding mortgage loan.
CHCWA fails to see how offering what amounts to sub-prime loans to WA home buyers, as is the case here, is a sensible move for any of the parties concerned.