Mental note, withdraw savings from ING Direct savings account.
What am I talking about?
Get a load of this from the Sunday Telegraph: “Revealed: The home loan that could save you a fortune”.
According to a delighted Nick Gardner of the Sunday Telegraph, “Homebuyers are to be offered never-ending mortgages in a bid to overcome Australia’s affordability crisis.”
He goes on, “ING Direct, Australia’s fifth largest lender, is preparing to sell loans that have no fixed term and no requirement to repay any capital along the way.”
Hurrah! Just the kind of thing our Ponzi banks need, another scam to make sure the populous is indebted in death as in life.
Hats off to ING Direct.
Hats off to Nick Gardner for gushing about it so lovingly.
ING Direct CEO Don Koch told the gooey-eyed Gardner: “People are needlessly being denied the chance to buy a property while prices spiral rapidly out of their reach. There is an urgent need to provide more affordable options and borrowers should be able to choose whether they want to repay the capital, or not.”
“Needlessly denied”? What, because they can’t afford it because either the prices are too high or they don’t have enough money? Yeah, your editor has been needlessly denied the chance to buy an Aston Martin, what’s Don Koch gonna do about that? I want an Aston Martin, give it to me…
But this was our favourite quote attributed to Don Koch. He wants ING Direct to be the customer’s “mortgage partner for life.”
Ooh, we’re going weak at the knees here. How romantic. Can you imagine it? A lovely spouse, two wonderful kids, a dog named Pooky, and [sob] your very own mortgage for life. [Weep].
So, what does this [cough] innovation from ING Direct mean? It means the banks believe that borrowers believe that there’s no downside to the Australian housing market.
In other words, ING is playing on the ingrained belief among many Australians that the price of housing never falls and therefore there’s no need to reduce the interest liability.
After all, you can just sell the house pay off the principle and Bob’s your uncle, a clear profit. As long as you ignore the thousands paid in interest of course. But that’s never mentioned anyway, so just shut up about it alright.
And it obviously also means the banks know they’re onto a winner. Think about it this way. The bank doesn’t care whether the borrower ends up owning the house or not.
The bank figures that the average time a borrower stays in a house is only about five years anyway – that’s a guess by the way.
If you put yourself in the shoes of Mr. or Mrs. Bank Manager, what’s more important to them is that you don’t default on your home loan. And what better way to ensure that than to make sure your repayments are as low as possible.
Take out the requirement to repay the principle and there you have it, a supposedly cheaper home loan against a home you’ll never own but which you’ll be indebted to for the rest of your life.
As I said above, hats off to ING Direct on this one. They are the bright ones – for now.
They’ve found an ingenious way of getting their customers hocked up to the eyeballs for life. And providing they can help to keep the housing Ponzi scheme going, it will earn them a tidy sum.
But that’s the thing isn’t it. It’s still a Ponzi scheme, sucking in more suckers who are prepared to pay ever higher amounts for a gradually depreciating asset. The banks know what a massive bubble they’ve blown, but it’s now too late to stop.
They’ve got to keep blowing it up because they know once the bubble starts deflating there will be no stopping the carnage.
The way we look at it is that buying an overpriced home in this market is just plain crazy. But I tell you what, buying an overpriced home with a principle and interest mortgage is 100 times better than letting yourself get sucked in by this example of banking scammery.
It takes the worst element of buying a house – the interest costs – and combines it with the worst element of renting – not owning the asset – and combines it into one. The result is a money spinner for the bank and an economic disaster for the suckers who are dumb enough or desperate enough to take them up on it.
Here’s how the numbers stack up. A borrower buys a house for $1 million putting down a deposit of just $50,000. They borrow $950,000 paying $5,826 per month, or nearly $70,000 per year in interest.
How can the bank possibly lose? Even if the borrower defaults and the property is sold at a discount the bank is still likely to come up trumps – providing the housing market doesn’t crash.
While the poor old borrower is out on their ear and faced with having to pay the shortfall between the mortgage amount and the house sale price.
But the way the product is sold to the borrower is that house prices always rise. So what’s the big deal, if house prices always go up, if they double every 7-10 years then it doesn’t matter if you’ve just paid interest because at least the capital has increased.
Here’s the thing though. A buyer needs for the value of the house to at least double every 10 years just to break even. With interest rates around 7% and an annual growth rate of 7% required in order for it to double, the buyer needs well above that growth rate in order to make anything on the deal.
As we’ve pointed out before, just because house prices went ballistic during the 1980s and 1990s you shouldn’t assume that will happen again. The easy credit that flowed like crazy from the banks was a once-off spurt.
It made plenty rich, and now the belief is that it’ll happen again.
But the easy credit that’s flowing now is merely keeping the market afloat. It won’t have the same multiplying impact as before.
You can think of it like a car reaching top speed. The 1980s and 1990s was the big acceleration as the credit market went from 0-200km/h in a flash. But 200km/h is the top speed. The banks have to keep their foot to the floor just to maintain that speed, they can’t go any faster.
And they know if they take their foot off the credit gas, the housing market will start to implode.
Hence why the banks are so desperate to keep refuelling the boom. They know that once the fuel runs out they’ll be in big trouble.
[Reader's voice: enough with the metaphors already]
But the folks at InfoChoice claim the ING Direct product will be great because “Depending on the size of the loan, it could add hundreds of thousands of dollars to a borrower’s cash flow over their lifetime.”
In actual fact it will subtract hundreds of thousands of dollars from a borrower’s cash flow over their lifetime. Remind us not to take out a subscription to InfoChoice.
But seriously, let’s be honest about this. If you can’t afford to pay an extra $700 or so each month in order to pay off some of the principle, then you really shouldn’t be taking out a loan for $950,000.
And the same goes for lower value amounts.
The way I look at it is that the interest only period is the banking equivalent of a drug dealer giving a junkie their first shot of heroin for free – “Go on, just try it, there’s no obligation old bean…”
Remember, the teaser rates in the United States helped push their housing market into the abyss. Borrowers got hooked on the super low rate and then copped it in the proverbial when the rates were reset higher.
Here, under the ING Direct plan, the outcome will be more insidious. Perhaps rather than directly causing a collapse in the housing market, it will succeed in ensuring the Australian economy becomes even more lopsided.
More and more resources will continue to be poured into Australia’s singularly most unproductive industry. And fewer resources will be made available for investment elsewhere in the economy.
We’ve read recently that some commentators believe Australia is suffering from Dutch Disease. That is the economy becomes so reliant on the resources sector that it draws all the investment to it, and therefore investors neglect other areas of the economy.
Can you see where I’m going with this?
That’s right, Australia does have a terminal case of Dutch Disease, but it’s not due to an over-reliance on the resources sector.
The real danger of Dutch Disease is in the housing market. Because the market is so heavily rigged towards property, other more productive industries are starved of life.
The access to capital and investors is blocked by those who want to raise funds for property investing.
Banks see property and housing as a lower risk proposition and so they’ve backed it to the hilt. The problem is, backing something that’s low risk to the degree that the banks have done with easy credit, has actually turned housing into a super high risk asset.
So instead of capital going to entrepreneurs who have developed a great new labour saving idea, or a fantastic new technology, or even an innovative service, the banks are too busy pouring dollar after dollar into the massive Australian property Ponzi scheme.
Simply because they know they’ve got to.
The fact is, any new product from the banks which only succeeds in increasing the debt burden while seemingly making it cheaper for people to borrow has to be bad news for the Australian economy.
Household residential debt is already at records highs, close to $1 trillion. Has no-one learnt the lessons from two years ago?
Has it not sunk in that the cure for excessive debt isn’t to just make the debt cheaper so everyone can join in?
If you think the Australian and global economies are out of the woods, then think again. This new ING Direct product may only have a small impact on the economy, but it’s indicative of which way economies are continuing to head.
And that is down the path of self-destruction.
To finish with, it’s perhaps appropriate that it should be a Dutch bank that’s helping to make the Dutch Disease in the Australian property market even worse.
Not that the Australian banks needed any help from overseas. But we’re sure they’re grateful for any assistance they can get to keep the massive housing bubble from bursting.
Cheers.
Kris.
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… or should that have been the chickens coming home to roost?
Far out. That’s taking it to a whole new level of desperation to get business. Can only hope buyers open their eyes and see it for what it really is – a never ending mortgage with nothing to show for it.
KML – Who were you addressing with that comment?
The question at hand is whether your debt can be inflated away, so that you can pay it all back within that time frame. The answer is to the affirmative. For example, if real inflation is running at around 5 – 6% pa, then with a combination of wage rises and asset appreciation the debt can be easily cleared. Indeed, you can clear it in less than half the indicated timeframe if you sell half of your initial investments, following their doubling in value in nominal terms.
– You make the assumption than wages will rise in line with inflation. I doubt it. Furthermore, your doubling in nominal terms will ride along with doubling in the cost of just about everything. You assume all this risk.
Is this unrealistic? Not at all. History has shown that, if monetary settings are “stimulatory,” (read: interest rate settings are negative in real, inflation adjusted terms), then it is very likely that more money will be created than would otherwise be justified by real economic growth, and the excess liquidity is going to end up, amongst other things, in hard assets, pushing up their nominal value.
– Read Taleb. Basing your probability on past events is foolish.
JC – History speaks for itself, while the future is silent.
The assertion was made that you cannot inflate debts away.
This flies in the face of post-war experience.
You don’t even have to assume that wages will keep pace with inflation for the example to work. Besides, the example is not in the least hypothetical. It is just a representative example of millions and billions of instances, where wealth was created on the back of borrowed money which was put into real assets.
Whether the future will be the same as the past, who knows? Regardless, the point stands: Debts can be, and have been inflated away over the decades. And the same thing can be done going forward. Indeed, this is what any sensible and responsible government will try to do. Opting for the opposite, of a deflationary crunch, will cause far too many losses and disruptions to make it a better alternative.
“Not in Oz, as far as I know. Westpac came close in 1987.
In US, FDIC regularly seizes assets of undercapitalised banks. The biggest casualty was Washington Mutual. ”
Thanks SV. Hence we don’t have a single example in this country where there was an orderly, prompt, apolitical administration of a financial institution at no cost to the tax payers. I’m sure the banks are well aware of this and have deliberately dug their hooks even deeper into the tax payer’s flesh. You reading this Kris? The banks and govt are the same animal – two ends of the same Push-Me-Pull-You (from Dr Doolittle).
From Wikipedia’s Pyramid Building Society (Vic) – “They collapsed in 1990 with debts in excess of $2 billion. The cost of the collapse to the Victoria taxpayers was estimated at over $900 million, causing a fuel levy of 3c-per-litre to be introduced by the Victorian Government to recover funds. The levy remained in force for five years.”
Dude you obviously don’t have a clue. I got through about the first 1/3rd of the article and got tired of reading your one sided narrow sighted blog. If you don’t like the program DON’T USE IT! You clearly have no investment sense or you’d know there are better things to do with your money than tie it up in your house. You obviously have no real real estate sense or you’d know that housing will ALWAYS go up overall. Yes we are in a downturn now but look past your short sighted last 2 years and look over the last 10, 20, or 30 years! And besides all that does ING not only say that you don’t have to repay to principal but you CAN’T pay to principal??? Having a lower minimum payment is a great way to get by if you’re income goes down for a period then you can start paying toward principal again when your income goes back up. I highly recomend you stop, take a breath, then do some research on real estate values over the last 50+ years, then read a book by Marian Snow entitled Stop Sitting On Your Assets.
These fantastic news have now reached Canada. I am canceling my accounts.
All the world’s problems are a direct consequence of over population.
Housing affordability, the environment, crime, infant mortality.
Everyone is too scared to say it though, especially politicians.
While we’re on ING Direct to Offer Neverending Mortgages, The disadvantage of this type of mortgage could be that if the Bank’s Base Rate falls you will not benefit from lower payments.
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