You'd think that our governments would learn from the past mistakes of other nations that have led to economic collapses, right? Well, not in Australia, according to Reserve Bank Governor Dr Philip Lowe, as reported by The New Daily on April 5.
"Too many loans are still made where the borrower has the skinniest of income buffers. In some cases, lenders are assuming that people can live more frugally than in practice they can, leaving little buffer if things go wrong."
His speech, made at a Reserve Bank board dinner in Melbourne, comes after activity from regulatory bodies around the country over the last month, aimed at reducing the number of unaffordable home loans in Australia. The big banks have recently dominated headlines for scandals and poor internal practices, but this lending takes the cake. The national economy is at stake, and peoples' homes could be on the chopping block.
What could happen if people are unable to pay their mortgages?
If someone runs into financial difficulty and they don't have a sound savings buffer to keep up with home loan payments, they might fall behind. If this is the case, the lender will notify the individual (or couple) that they have missed a payment. It's up to the homeowner to contact their lender and explain the situation, after which (hopefully) they can reach an agreement.
If an agreement cannot be reached, the lender will send a Default Notice, and there is a 30-day window to settle the account (to catch up with payments). If there is no resolution, the lender will send a Statement of Claim, and finally apply for writ, whereby they seize the home and can sell it to settle the home loan. This unfortunate eventuality leaves the family without a home, but the whole situation can be avoided if these unaffordable loans aren't an option.
Why are people applying for loans they can't necessarily afford?
Dr Lowe blames the rising house prices in the country on an increase in investment activity which is forcing people to take out riskier loans:
"With global interest rates so low, many investors have found it attractive to borrow money to invest in appreciating residential property. This has reinforced the upward pressure on prices."
The big banks care about their bottom line – a customer-owned bank like CAPE cares about its customers. For help getting a suitable home loan for your financial situation, both now and into the future, make sure you get in touch with our team today.