this will get ugly

  1. 1,259 Posts.
    taking on long term debt to finance consumption is not a wise idea. a business would go bankrupt doing this :

    Using your home as a credit card
    By Jim Dickins
    March 21, 2004,4057,9022803%255E462,00.html

    Soaring property prices have unleashed an explosion in home-equity lending, the latest credit fad in which homeowners borrow against the increased value of their property.

    Early figures for 2004 suggest the practice has doubled over the same period last year, freeing up cash for reinvestment or spending on renovations, cars and holidays.

    With interest rates still at historically low levels and lenders falling over themselves to snare new business, home equity offers Australia's emerging suburban millionaires the chance to cash in on huge gains in their nominal wealth.

    However, financial advisers warn that the loans are like a credit card on steroids, albeit with lower interest rates.

    They fear the lure of easy, cheap credit may tempt homeowners to run down equity in their principal asset to fund frivolous, short-term consumption.

    However, lenders say it offers more economical borrowing than traditional personal loans or credit cards.

    Mortgages can usually be extended by an amount comparable to the increase in value of the property, potentially adding hundreds of thousands of dollars debt.

    At the other end of the scale, many lenders now offer a redraw facility for daily expenses.

    For example, Yes Home Loans offers redraw amounts as low as $50.

    Yes chief executive Lee Boueri said the trend reflected increased competition in the market and demand for flexible banking.

    "Most financial institutions would prefer the higher premiums (of personal loans)," Mr Boueri said.

    "But I think this is part of a general community drive."

    Catherine Wolthuizen, finance policy officer with the Australian Consumers Association, said those nearing retirement were particularly vulnerable to overspending.

    "It's going to be an attractive option for people and it can be suitable for some, if they appreciate the costs.

    "When you make the decision to draw down equity, you are leaving yourself with a larger debt, which could be a problem when you retire.

    "We tend to assume that people already own their home by the time they retire."

    Home lender Resi Mortgages reports that applications for home-equity borrowing increased 113 per cent in January-February this year over the same period in 2003.

    Chief executive officer Stephen Mayers conceded there could be dangers.

    "It's not something I would recommend for people who are struggling with their current home-loan repayments," he said.

    But it unlocked otherwise inaccessible gains in personal wealth.

    "In some cases ... the large increases in property values over the last five years have seen people suddenly become millionaires (without) extra money in their pockets to show for it," he said.

    Mr Bouri said Yes Home Loans, like most institutions, maintained a strict approvals policy to ensure borrowers did not over-reach themselves.

    It aimed to keep repayments below 35 per cent of total income, with an interest-rate buffer of 2.5 per cent.

    But he agreed the easy credit could cause problems for some.

    "There's always an element of the population that's always getting into trouble with credit," he said.

    "The compensating factor is that they're paying less interest."

    The Sunday Telegraph
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