RBA warns against 100% home loans

Thursday 23 August 2012

Article by Mozo

The Reserve Bank of Australia (RBA) has hinted that 100 per cent home loans could be scrapped in the future as they could be adding to the country's property boom and bust problems.

RBA warns against 100% home loans

At its annual conference, RBA officials talked of the implications of offering Aussies home loans for the entire value of a property – including the effect this has on wider pricing in the property market.

The RBA discussed results from three economic papers that showed that forcing would-be homeowners to put forward some of the capital for a property themselves would help moderate the property cycles that played a part in the recent and ongoing global economic crisis.

Published by the RBA, the International Monetary Fund (IMF) and the Bank of International Settlements, the three independent reports all hinted at the benefits of capping loan-to-value rations in the residential property sector.

Senior IMF researcher Giovanni Dell'Ariccia said: "[Putting some of the financial burden on homeowners] will likely result in fewer defaults when the bust comes … [and] reduce the risk that a large sector of the real economy ends up with severe debt overhang."

He added: "Containing leverage will reduce the risks associated with declines in house prices."

Mortgage interest payments in Australia are unlikely to fall further if the RBA sticks to its guns and maintains interest rates.

According to minutes from the last cash rate meeting at the bank, the likelihood of a cut is low as levels of economic growth in the country remain positive.

With the rate at 3.5 per cent, the economic environment is such that many Aussies are willing to take on mortgages or other forms of credit.

However, movements in the cash rate are not an impossibility, especially as the global economic crisis rumbles on and the debt crisis in Europe continues to have a major impact.

"There is still that big offshore uncertainty, which suggests that if they are going to change rates soon it's still more likely to be down than up," economist at the Commonwealth Bank of Australia Michael Blythe noted.

Have a question about personal loans? Ask the money gurus at Mozo Answers.ADNFCR-1761-ID-801435195-ADNFCR

Back to top