This story was found at: http://www.smh.com.au/articles/2003/11/27/1069825922257.html
By Peter Weekes
November 28, 2003Tens of thousands of home owners who have “low doc” (limited documentation) mortgages may face interest rate rises of up to a percentage point as the Australian Prudential Regulation Authority moves to limit any potential bank fallout from defaults.
The regulator, accused of taking its eye off the ball before the collapse of insurance giant HIH, says it wants to reduce the risk these loans pose to banks as interest rates rise.
It said experiences in other countries revealed that these loans have a higher default rate than conventional mortgages.
By increasing the amount of capital banks must hold in relation to the amount they lend for these products, the loans may become more expensive for the banks if they do not already have a high capital ratio, leaving them with little choice other than to increase interest rates – or leave the market.
Over the past two years, those without a regular weekly income (such as small businessmen, contractors, and seasonal and casual workers) who do not satisfy the requirements of conventional loans have flocked to low-doc products.
Increasingly, the banks, fearful of losing market share, have joined other lenders in offering such products: it is estimated that low-doc loans now account for 15 per cent of Australia’s $421 billion home-loan market.
In its submission to the First Home Buyer inquiry, the Reserve Bank said the rapid escalation in house prices was largely due to “the liberal access to finance enjoyed by investors”.
Reverse mortgage loans that let asset-rich, cash-poor home owners sell part of their property back to the lender may also be affected if the sale involves more than 60 per cent of the home.
Do any of the mortgage brokers on the froum have any idea if and when this might happen?>>It said experiences in other countries revealed that these loans have a higher default rate than conventional mortgages.<<
What are they talking about ???
Never mind other countries, surely the default rate in t-h-i-s country is well known so why isn’t that quoted ?
And a higher default rate so what ? Doesn’t the lender get compensated for that by charging a higher interest rate.
In any event, all loans are mortgage insured so the banks themselves (except the few who do the mortgage insuring inhouse) wouldn’t be affected.
Pisces133
Howdy,
As a broker I genuinely don’t see the interest rates on low doc loans streaking ahead of the pack primarily because there is so much competition between low doc products. [
][^] That and the fact that yes they are getting a premium payment already to cover the higher than expected default levels.I think that if rates go up over about 9% in the next 1-2 years and/or property values drop significantly then all loans will be affected fairly equally. Low doc loans account for about 20% of the market, and that’s PPOR as well as IP’s. IP’s on the other hand currently make up about 40% of the lending market and 35% of the whole property market. Will we see more defaults in low doc lending than in the rest of the loan market – hard to say!
Regarding property values – personally I don’t see a few dozen towers of ‘concrete boxes in the sky’ (Steve’s term) in inner city Melbourne and Sydney as the only barometers of the market and somewhat tire of the hype. However, if prices in outlying established suburbs start to drop significantly along with steep rate rises then Lender Mortgage Insurers will be forced to increase premiums, which may lead some banks to increase interest rates higher than the RBA increases or on-charge LMI below the 80% LVR threshold. Again I believe competition will dictate which sectors of the market this change will affect most and all lenders will react differently, giving borrowers choices.
Some economists believe this downturn will happen next year, others think it’ll start in 2006/07 after three more years of boom, and still others say steady as she goes … who knows?!!
As Steve suggested at the course, in addition to always doing your sums for a ‘when to buy’ strategy, also set yourself up with a ‘when to sell’ strategy too for every purchase!
I’ll stop prattling on, but as I often recommend – get a good broker onside to help you stay informed and to explain all your options!
Happy investing.
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Mel
[email protected]not all low doc loans are mortgage insured, but banks are already hedging their risks by having lower LVRs and higher rates for these loans. I don’t think they have a higher default rate than the normal loans either. And it is not just people who do not have the income that use them. Many people just use them for conveniance too. If you are self employed with a few companies and trusts it is a real hassel providing all the tax returns etc
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
not all low doc loans are mortgage insured, but banks are already hedging their risks by having lower LVRs and higher rates for these loans. I don’t think they have a higher default rate than the normal loans either. And it is not just people who do not have the income that use them. Many people just use them for conveniance too. If you are self employed with a few companies and trusts it is a real hassel providing all the tax returns etc
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
][^] That and the fact that yes they are getting a premium payment already to cover the higher than expected default levels.
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