A Disaster Waiting to Happen

Submitted by Michelle on Fri, 04/24/2009 - 16:03

Source: News.com.au
FIRST-HOME buyers are being warned that generous loan criteria could land them in financial stress, after revelations that the top four banks will lend up to $465,000 to a purchaser on a salary of $70,000 a year.

A survey by The Australian, which sought pre-approval interviews with bank managers, revealed Westpac would lend $465,000, the Commonwealth Bank was willing to lend $444,000 and the National Australia Bank would approve a $380,000 mortgage to a first-home buyer on $70,000 a year and a credit card with an $8000 limit.

The loan offers were made on the proviso the borrower paid mortgage insurance, which is a one-off cost as high as $10,000.

The ANZ's loan criteria was much tighter, requiring a 10 per cent deposit for a loan, as well as mortgage insurance.

The other three banks have recently tightened loan criteria to first-home buyers, requiring a minimum deposit of 5 per cent, including a minimum of 3 per cent saved over several months, and mortgage insurance.

But the survey's findings defy the general belief that banks have become stricter on first-home-buyer lending due to the global financial crisis.

A $444,000 loan from the CBA would require someone on $70,000 to spend 62 per cent of their monthly income on mortgage repayments, which amounted to $2827 a month.

Real Estate Buyers Agents Association of Australia president Byron Rose said a loan of more than $400,000 for someone on $70,000 a year was "absolutely too much".

Mr Rose said there had never been a better time to enter the market, with home ownership 40 per cent more affordable as a result of interest rate cuts.

But first-time buyers lacked experience as they tried to live the "Australian dream".

"Our concerns are for first-home buyers who do not have sufficient cushioning in equity or cash reserves should their financial circumstances change."

Mr Rose said the first-home buyers grant was a "disaster waiting to happen" in Sydney and Brisbane's western suburbs because it was prompting people to take out mortgages they could not afford.

Some had previously been buying homes using just the grant as a deposit. "As soon as rates go up, it will come tumbling down like a house of cards and you will see defaults left, right and centre," Mr Rose said.