You probably don’t need reminding about the MoneyWeek view on UK house prices. If you want a quick recap, here’s what Merryn had to say on the subject earlier this week. So I’ll not repeat our case here.
But it seems we’re still in the minority – 75% of British homeowners believe house prices will keep climbing over the next year, according to estate agent Your Move. And indeed, some recent UK mortgage offers do suggest the country’s lenders are losing the plot again. The 95% loan-to-value mortgage is making a hesitant return to the market, for example.
But if you want to see real mortgage madness, you have to go Down Under. Thanks largely to Chinese government spending, the Aussies managed to evade recession. So their housing bubble just kept getting bubblier, with only a hint of a correction.
And that’s led to the latest innovation in home loans – the never-ending mortgage. That’s right, ING Direct, Australia’s fifth largest lender, is preparing to sell interest-only loans that have no fixed term, and where there’s no need to pay back any capital along the way.
“People are needlessly being denied the chance to buy a property while prices spiral rapidly out of their reach”, says ING Direct boss Don Koch. “There’s an urgent need to provide more affordable options and borrowers should be able to choose whether they want to repay the capital or not.”
After all, why should they worry about repaying the capital? If house prices go on rising, their equity will just keep stacking up. Even better, everyone’s a winner. The deals could add hundreds of thousands of dollars to borrowers’ cash flow over their lifetimes, says Shaun Cornelius at comparison website InfoChoice.
So, no catch then? Somehow, I think you might just have spotted one or two.
Indeed, this is “economic idiocy at its finest”, says Mike ‘Mish’ Shedlock at globaleconomicanalysis.com. “No one ‘saves’ anything by not paying down mortgages. The money is simply spent (most likely wasted) elsewhere. Moreover, home prices do not perpetually go up. Ask any US homeowners headed for retirement, and who are severely underwater on their homes, what they think of Koch’s hypothesis”. And “what happens when interest rates rise, perhaps even double, and borrowers struggle to make even the interest payments?”
And of course, taking out a never-ending, interest-only mortgage means you are effectively just renting your home from the bank. In fact, it’s a lot worse than renting. You lose the flexibility of renting; you can’t negotiate with a bank the way you can with a landlord; and what if property prices fall? You’ll have no equity cushion in the house at all beyond your deposit. This is like taking out a massive spreadbet on property prices, only using the roof over your head as the margin.
You’d have to be daft to offer this mortgage in the first place. But you’d have to be even dafter to take it out. If ever you wanted to see the ultimate ‘top’ signal for a housing market, this would surely be it.