ASIC Media Release re 100% Loans

Media and information releases

03-365 Consumer risks in ‘no deposit’, ‘low deposit’ and ‘100% loans’

The Australian Securities and Investments Commission (ASIC) today warned consumers about the risks involved in using ‘no deposit’ or ‘low deposit’ and ‘100% loans’ to finance their homes or investments in real estate.

‘Taking out a ‘no deposit’ loan for 100 per cent of the value of the property will often involve special conditions and higher levels of risk, so it is vital that consumers understand what they are getting into’, ASIC’s Executive Director of Consumer Protection, Mr Peter Kell said.

Special conditions
Special conditions that are not always clear from the advertising may include:
higher interest rates;
additional fees, including a ‘risk fee’;
additional security required for the loan, for example, your car;
requirement for mortgage insurance;
use of deposit bonds;
in some cases, more stringent credit assessment; and
short term loans only.
Risks
‘Such loan products may suit some consumers, but they also expose the borrower to higher repayments if interest rates rise’, Mr Kell said.

‘Remember that the mortgage insurance typically required with such loans protects the lender, not the consumer. If forced to sell, you may lose everything you invested in the property and still owe money if the sale does not cover what you borrowed.

‘ASIC is concerned that these loans are being aggressively marketed in some cases, to consumers with a troubled credit history, casual workers or self-employed people who may be in a weaker position when it comes to dealing with the financial risks involved.

‘ASIC recently took enforcement action against a finance broker offering ‘100 per cent’ loans for misleading and deceptive advertising and business practices.

‘In this case, some consumers were sued for the deposit bonds used with the loan once the deal collapsed. It is important to understand that a deposit bond protects the seller of the property. It will not offer any protection for the consumer if something goes wrong.

‘ASIC has a number of other matters under investigation’, he said.

Mr Kell also warned about the risks of ‘vendor finance’ agreements.

‘These agreements give property purchasers few rights and little protection, because you do not get legal title to the property until all the money owing to the vendor is fully paid’, Mr Kell said.

‘If you cannot keep up repayments, you lose possession of the property, all prior payments, and all money spent on maintenance, renovations and rates’, he said.

Background information

Deposit bonds
A deposit bond is a guarantee, usually issued by an insurance company, which can be used by a purchaser instead of paying a deposit on the exchange of contracts for the sale of land. The purchaser must then pay 100 per cent of the purchase price on completion of the sale.

Under the deposit bond, the issuer of the bond promises to pay the amount of the deposit to the seller of a property if the purchaser does not complete the sale of the property. If the bond issuer is required to pay the deposit, it will seek to recover that amount from the purchaser.

Vendor finance
Vendor finance is an agreement where the owner of a property (often called a ‘wrapper’) offers finance to the purchaser. The purchaser never legally owns the property until all the money owing to the vendor has been paid.

The purchaser usually pays an interest rate about 2 to 2.5 per cent higher than the standard home loan, and may also pay a premium over the purchase price of the property to the vendor. Because the purchaser is not the owner, they have limited rights.

If the vendor in their turn has borrowed to financed the property and they default on that loan, the purchaser still loses possession and any possibility of ownership even though the purchaser is not in default to the vendor. The purchaser’s only recourse may be legal action against the vendor who may have no assets.

Simon Macks
Mortgage Broker
[email protected]
0425 228 985

Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.