Got to keep that ponzi going! From The New Daily:
A leading financial services expert has described the rise in interest-only mortgages among first home buyers as “disturbing” and likely to trigger higher loan defaults in the future.
Data published by the Australian Prudential Regulation Authority shows that more first home buyers are resorting to interest-only loans to get a foothold in the property market.
The official statistics show that the total value of interest-only loans made by Australian banks rose by $10 billion to $481 billion in the June quarter.
Historically, interest-only loans have been popular among investment borrowers, but the latest data shows that owner-occupiers now account for a larger proportion of interest-only mortgages compared to June 2015.
Dr Adrian Raftery, a senior lecturer in financial planning at Deakin University, believes the trend in the official data indicates that a time bomb might be ticking for thousands of low-income borrowers who bought into the booming property market in the last 12 months.
“There’s been a lot of brainwashing from the operators of get-rich-quick schemes encouraging investors and owner occupiers to take out interest-only loans,” Dr Raftery told The New Daily.
“Brokers are also contributing to the growth of interest-only mortgages because they get bigger trail commissions from banks when borrowers take longer to reduce the principal.
“This is a disturbing trend.”
The problem with interest-only loans is that borrowers do not build equity in their homes until their mortgage contract requires them to start reducing the principal.
That can be up to 10 years after they take out the loan.
“If there is an economic downturn and interest-only borrowers lose their jobs they have little room to adjust their repayments with the bank,” Dr Raftery said.
“For people with few assets or savings that might force them to sell the mortgaged property at a loss.
“Australia could lose a whole generation of savings because of how these loans are structured.”
At the end of June this year the value of interest-only loans in Australia exceeded the value of investment loans by $60 billion.
That means the banks are now selling a larger number of interest-only mortgages to owner-occupiers.
This was not meant to happen because bank regulators have been trying to crack down on the growth of risky lending practices in the banking system since the middle of last year.
Interest-only loans add to credit risk in the banking system because they take much longer for borrowers to pay off.
Dr Raftery is concerned that banks are contributing to the build-up of credit risk in Australia by writing more interest-only loans, especially to people on low incomes.“If there is a correction in the property market or a downturn in the economy a lot of people are going to default on these loans.
“Owner-occupiers should be using the current low interest rate environment to pay down as much of the loan principal as they can.”
From Wikipedia on the US housing bust:
The United States (U.S.) subprime mortgage crisis was a nationwide banking emergency that contributed to the U.S. recession of December 2007 – June 2009. It was triggered by a large decline in home prices after the collapse of a housing bubble, leading to mortgage delinquencies and foreclosures and the devaluation of housing-related securities. Declines in residential investment preceded the recession and were followed by reductions in household spending and then business investment. Spending reductions were more significant in areas with a combination of high household debt and larger housing price declines.
The expansion of household debt was financed with mortgage-backed securities (MBS) and collateralized debt obligations (CDO), which initially offered attractive rates of return due to the higher interest rates on the mortgages; however, the lower credit quality ultimately caused massive defaults. While elements of the crisis first became more visible during 2007, several major financial institutions collapsed in September 2008, with significant disruption in the flow of credit to businesses and consumers and the onset of a severe global recession.
There were many causes of the crisis, with commentators assigning different levels of blame to financial institutions, regulators, credit agencies, government housing policies, and consumers, among others. A proximate cause was the rise in subprime lending. The percentage of lower-quality subprime mortgages originated during a given year rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S. A high percentage of these subprime mortgages, over 80% in 2006 for example, were adjustable-rate mortgages.
Interest-only loans are a form adjustable-rate mortgage. Pure sub-prime stuff.