How to Get a $200,000 Loan With a $2,000 Deposit

On our mind is the flaky and fragile Australian banking system.

Do you remember it was only a few weeks ago that the mainstream press was telling you that the major banks were winding back their reliance on the government wholesale funding guarantee?

Well, maybe they are, but they still can’t help themselves.

According to the Sydney Morning Herald, the Commonwealth Bank has raised USD$1.25 billion last week, every last cent guaranteed by the taxpayer. And the week before Westpac raised $1.1 billion guaranteed by you and other taxpayers.

Even that wasn’t enough to get us riled this morning. It takes more than that these days.

No, there were two other things that came to our attention over the weekend that made us stagger uncontrollably about the house.

But before I get onto that, a quick follow up to last Friday’s Money Morning. Thanks to all the climate change induced rain over the weekend we were stuck inside and so managed to have a glance at the Money Morning message boards.

It seems that some readers believe we misrepresented the “Property Professor” by claiming that he believes property doubles in values every ten years. Apparently what he was really saying is that property provides you with a hedge against inflation compared with renting.

Of course, he didn’t say that at all. It’s typical of the property spruikers trying to cover each other’s tracks when their nonsense and fallacies are exposed.

Naturally, we don’t blame the spruikers for trying. They’ve had it easy for so long, where no-one has ever dared challenge their property investing falsehoods.

Anyway, for fear of being accused of misrepresenting the Property Prof, how about this snippet of financial advice from the emeritus professor of debt:

“If you could, rather than buying one $400,000 property with a principal and interest loan you’d be better getting two $400,000 properties with two interest only loans. When they double in value, sell one and the other one’s freehold. If you keep that principal and interest loan, it’s going to take you 25 years to do that. You hold two and you only need one property cycle, seven to 10 years, and the other one’s freehold.”

That little gem was from an investing round table held by The Advertiser in Adelaide.

But the argument that somehow the Property Prof was misrepresented doesn’t stack up when you read an article he wrote for Realestate.com.au:

“I have calculated capital growth of about 7% per annum, which means it doubles in value every 10 years.”

Calculations which fall apart if interest rates are higher than 6.5% and collapse completely if property turns out not to double in value every 10 years.

But never mind. As I say, that’s not what got us revved up over the weekend.

Something that did make us sit up to attention was an email from one Money Morning reader who suggested we look at an article on Ratecity.com.au which quoted Westpac CEO, Gail Kelly as saying:

“We are a very highly indebted country – on average we borrow twice what we save… we need to incentivize and drive additional savings as a nation.”

Hmm. What do we make of that? We’re not going to argue against savings. Saving money is a good thing.

The trouble is under the current banking system, saving money in a bank account only makes the problem of excess borrowing worse.

In a perverse way, people who saved money in a bank are partly to blame for the collapse of the banking system and the expansion of borrowing in the Australian market.

And it’s what makes the comments from Kelly all the more troubling. She’s making the right sounds “savings are good”, it’s just that like every other banker, when she’s got her paws on your savings, it’s just used to leverage themselves up to the housing market.

Don’t forget that around 50% of all bank lending goes towards residential real estate. The money that you tuck away in a bank account for a rainy day is used as security so house buyers can get 100 to 1 leverage on a house.

That’s the real reason Kelly and the others want you to save more, so they can lend more.

If Kelly really was concerned about the amount of borrowing then all Westpac would need to do is tighten their lending criteria.

That’s not hard is it?

Only doing so would mean the collapse of the housing market and that wouldn’t do much of the banks’ balance sheets.

And besides, now that the government has given the banks a free kick with wholesale and deposit guarantees there is no need for the banks to tighten their lending. They know they can push things to the extreme.

Which brings us to the other story that made us wince.

We tuned into the Barefoot Investor on CNBC yesterday afternoon. Hosted by Scott Pape, it’s a ‘family friendly’ investing show. He talks about budgeting and paying off debt, and all that sort of thing.

Anyway, it was the opening item that disproved all of the pap that we hear about the banks making it harder to borrow. And how the Australian banks have a much healthier balance sheet than overseas banks.

Scott interviewed a young lass from Sydney, the short story is that she had a $200,000 home loan which she took out now to qualify for the first home buyers debt.

But that’s not the half of it. The young lass looked as though she had barely graduated from high school, yet had a $200,000 mortgage which she had secured with a deposit of…

$2,000.

That’s right, two grand. In other words, 100 to 1 leverage.

Oh, and by the way, she didn’t have a full time job at the time she applied for the loan, and still doesn’t!

So how did the bank lend her $200,000? That’s simple, they got her old man to go guarantor for her.

Yep, don’t worry about income or a deposit or job security or the ability to repay a debt, as long as someone else is prepared to hock their home, the banks will give anyone a loan.

It’s a fairly sad state of affairs. And it proves that despite the propaganda from the mainstream press and the mainstream analysts, Australia’s banks are going to extraordinary lengths to make sure the lending and borrowing binge continues.

And it’s all built on the false premise that property values double every 7-10 years. The banks believe it’s true, the property spruikers believe it’s true and the home buyers believe it’s true.

The trouble is, it’s not true. When the mist clears all that will be left is a pile of bricks and mortar that’s worth 40% or 50% less than the loans covering them.

Until then, thousands more suckers will be convinced to buy into property at inflated prices under the false belief of it being an inflation hedge and a guaranteed path to millionaire status.

Cheers.
Kris.

 

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 finished down on Friday, by 1.33% closing at 4,685.80. An ordinary trading session on Wall Street has seen a pretty flat start to the Australian trading day.

The Dow Jones Industrial Average dropped off 23 points, finishing at 10,318.10. While traders are being told the ‘recession’ is over, they still shied away from speculative stocks. Traders chose to stick with stocks that can withstand economic uncertainty, like Coca-Cola Co [NYSE: KO] and Merck & Co [NYSE: MRK].

In the UK, the FTSE100 saw a sell-off of energy and mining stocks which forced the index to close at 5,251.41, down by 16 points.

The Nikkei had its first four week losing streak since in over a year, finishing at 9,497.68, down by 0.54%. Overall, last week the Nikkei lost 2.8%

The price of gold in Australian dollars is trading at $1,259.07, while in US Dollars it is trading at $1,151.20.

Currently the price of silver in Aussie dollars is $20.23 and in US Dollars it is $18.50.

The Aussie dollar versus the US dollar is trading at USD$0.9142, and against the Japanese Yen JPY81.21

Crude oil closed at USD$77.47

For the biggest movers on the market yesterday click here…


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


34 responses to “How to Get a $200,000 Loan With a $2,000 Deposit

  1. Kris, mate, you are a hard case. In order to illustrate the pros and cons of buying versus renting, one has to make certain assumptions. You cannot write down any illustrative figures without plucking out some number from the air as to the rate of inflation you are going to assume for the sake of the exercise. Now, if you think that 7% ongoing annual inflation is too steep or misleading an assumption, then why not pick a more conservative number and show how renting is going to beat buying on those assumptions?

    Or how about this: if you think that all such calculations are useless and misleading, why don’t you tell us why that should be? We pretty can assume agreement on money printing being firmly on the agenda, so we need some compelling arguments to convince us that in spite of the presses being kept in overdrive, Australian property prices are going to collapse. You may not have had time to check on the latest posts on the previous thread, so I will paste something highly relevant to this question for you shortly.

  2. Here is the link.
    http://www.numbeo.com/property-investment/rankings.jsp

    Now, if these figures are to be believed, then it seems to me that the common appeal that average prices cannot diverge much further from average income levels is way too simplistic, and arguments on either side must proceed along different, more sphysticated lines.
    And, YES, the question of ability to service debt can be assumed to be capable of being included in the overall argument, absent specific evidence and detailed arguments showing that ability to service will soon start falling away at higher prices or higher rates, which is possible, but then again, the manipulators will be still at the levers, so you will have to make some brave predictions about severely higher interest rates, etc. Steven Keen was game enough, so you won’t be the first to take the plunge.

  3. Kris – That scenario is very small segment of the market. Without wealthy parents who are willing to guarantee the loan with additional security and income, applicants cannot access this much credit and you know it.

  4. Hi CB,
    Whilst and interesting idea, you have to trust accurate inputs. This is hardly the ABS.

    Sydney in AUD
    http://www.numbeo.com/cost-of-living/city_result.jsp?country=Australia&city=Sydney&displayCurrency=AUD

    London in GBP:
    http://www.numbeo.com/cost-of-living/city_result.jsp?country=United+Kingdom&city=London&displayCurrency=GBP

    Note, I have travelled extensively, and lived in London for many years before moving to Sydney. Those London prices are totally out of whack.
    At the end of the day it comes down to judgement. Somebody in zone 2 in London (15min tube from work in the city) is unlikely to say they’re in the “City Centre”
    yet somebody 15min from the Sydney CBD eg Surry Hills or Kensington might.

    It would be better to canvas the salary of the data inputter, along with their rent/mortgage details because different demographics live different places etc, and would have a better estimation/judgement of what costs really are in the areas concerned.

  5. Peter’s right. This is a small segment of the market. On the other hand, the punters with the FHBG are a formidable segment. Who needs wealthy parents when you’ve got the benevolence of the Aussie govt? This truly is a wonderful country–a sun-drenched garden of Eden all paid for the taxpayer!

  6. GB – It would be a fraction of one percent. I don’t like it, but if mum and dad want to put their house on the line to help their kids, it is their right. Une thing I should mention is that the guarantee is limited to an amount both in amount and income.

    JC – buyers are putting in plenty of “hurt money” at the moment. The FHOG doesn’t even cover the state government stamp duty in most states. In fact if they disposed of both the FHOG and the stamp duties that were supposed to go when GST commenced, it would be a much fairer market for all. I would support that.

    At the moment we have huge disparities between states and we don’t need that. It just distorts the markets.

  7. One other point I should cover is the full time job issue. There are thousands of employees in industries such as the hospitality industry who have casual jobs, not full time, but they typically work 30 to 40 hours per week at higher rates than full time employees, but without annual leave etc. Anyone with a history of stability in that industry is acceptable as a borrower, so on the surface this rather flaky article may not be as damning as it appears. I don’t know the full facts, but I suspect that some relevant information was withheld in this article.

    Sorry about my usual typos.

  8. Kris, this unrelenting tirade against the property sector is starting to wear a little thin!!!
    I think history speaks for itself on this subject!

  9. Maybe we need to start looking at some stress test scenarios for our banks. What would happen in a genuine recession with falling home prices (yes it does happen – I bought a house for $117K in ’93 and sold it for $95K in ’98) and unemployment around 10%?
    I would question though your point about savers fuelling bank lending. My impression was that our banks got most of their capital from overseas and that actual deposits had become a bit of a side show. Perhaps Gail Kelly is feeling that this is a bad model. If so I suspect we’re going to need more than people socking away a few extra dollars a month.

  10. I think what Gail Kelly was also aiming at the Henry Tax Review to try and get a reduction in taxation on savings accounts as these are treated rather harshly in comparison to other forms of investment. A tax reduction on savings would spur people to save rather than pump their excess economic units into riskier places such as property/stock market/ponies.

  11. Hi Peter,

    I understand that the FHOG is not that much and only covers another tax, but I thought that it could be leveraged much like the young girl with wealthy parents who leveraged $2000. Also, I agree that service workers should also leverage into a home and they should not be discriminated against because they are casual labor. It almost makes us more desirable for immigration, like Las Vegas has been for service workers in the U.S.

  12. I’m amazed that a bloke who can stump up $2K for his daughter to borrow $200K can been seriously categorised as being a wealthy parent? The fact that this nonsense can occur for anything other than maybe a car loan is reason enough for alarm. Instead of attacking Sayce and coming up with vague guesstimates of how small or large the problem of irrational lending practices may or may not be go back to the earlier part of the post where the Westpac CEO is quoted as stating that we Australians are a very highly indebted bunch and need to start thinking about just how much we can really afford to borrow. Pretty clear stuff from the banker. Restricting access to large mortgages would be a very good place to start but that would probably tip the first domino wouldn’t it? The challenge that isn’t answered is that if our banks and non bank lenders had all the fundamentals right and are so rock solid in their lending practices to the mortgage sector which makes up over 50% and sometimes 100% of their business why did they and do they continue to need any government guarentees? And please don’t offer the ‘to support sentiment and confidence in banks’ excuse because if that’s all that’s actually keeping all the balls up in the air at the same time then God help us all when the music finally stops.

  13. Rycoka – the facts will never stand in the way of a good story.
    And why would any bank be stress tested when there is nothing to gain from a positive finding and everything to lose from a negative one? Remember, there are no free markets anymore, only interventions.

  14. There is a long, cutomary tradition of enabling less than credit worthy borrower through a willing guarantor. Also, the way of the world, by and large, is one where parents help their children in whatever reasonable way they can. In that light, would someone explain to me what exactly the fuss is about?

  15. Dudmeister, I find that plausible. The more the tax man leaves on the table, the more there is left for the banksters to grab.

  16. Hi JC – The stamp duty can’t be financed, it has to be paid at settlement or prior to settlement. If you are late in paying, added fines may apply, and you certainly can’t register your name as the new owner until the state has been paid it’s due.

    Or did you mean the FHOG could be leveraged, and repaid like a Hex debt. Yes that might work for some. I believe in SA they have a deposit loan scheme that someone mentioned before, but I don’t have much info on that.

    I was just trying to add some perspective to the issue. Sayce writes his articles to suit his agenda, and like any cheap journalist leaves out important pieces of info. Hell I’ve done it myself when I want to stir up debate, so I can’t claim the high ground completely, and sometines stirring up a debate by being controversial is good for us. When we discuss a subject we all learn something.

  17. Hi Dudemeister – great point. At present our tax laws really encourage borrowing cheap money and discourage saving by taxing any interest earned on those savings. In a world where interest rates are very low it does seem miserly to tax the little savings that we collectively have, and most people have the makor portion of their savings in super anyway.

    What do you guys think of having no tax on any interest earnings under a limit, say $2000 pa. That way people can save about $30,000 or $40,000 at 5% or 6% and not have tax as an issue. That would be double that for a couple simply by splitting the holding. That would encourage the average joe to save. Any comments????

  18. I think that once it gets to a point that people keep coming up with ‘new innovations’ just so people can continue to purchase a house then that’s the warning siren telling us that something is wrong…. i.e. Chris Joye’s shared equity, increased FHOG etc…

    and when something is wrong Mr Market will try to fix it at the same time the government supports it – and there can only be one winner!!!

  19. I had a mate’s younger brother say to me the other day “I want to buy a home”.

    Now this guy is not the sharpest knife in the draw, but he honestly believed that you didnt need a deposit to buy a house. The concept of savings has become unfamiliar to the next generation (he is 19, I am 27).

    They have become so accustomed to talk of mortgages, foot in the door, interest rates, negative gearing…that the simply idea of saving for something is being forgotten.

    Kris – please keeping harping on about this…It is a national disgrace and every day I become more certain that this thing (housing crash) will take down the economic health of the whole nation for a decade.

    There is now talk of mandating higher LVRs in Australia – as this is what Singapore and Hong Kong did to cool down their bubbles. Please do this Government!! PLEASE!!! Forcing people to save more would be the best thing you can do…in the long run that is!!!

  20. I like your idea PF, of encouraging savings in the manner proposed.

    I cant believe thrift is not being promoted by Government – it is common sense when you spend too much to start spending less.

  21. UK tax laws are nice in this respect. I believe all savings are taxed at 20% so long as the individual is a taxpayer.
    Other than this one can park GBP7,200 per tax year (cash and/or share combination) in an ISA (http://en.wikipedia.org/wiki/Individual_Savings_Account) and be entirely tax free. I believe this is what Rudd pathetically tries to aim at with the first home saver accounts.

    Whilst I think part of the strategy behind ISA’s is to guide savings for retirement, those with needs/wishes to save and access the cash prior to retirement for reasons such as purchasing a house/educating children etc also gain, wheras Super tax advantages are only directly realised upon retirement.

    I’d support an ISA-like system here in Aus that would give a tax break for all savers, that could be drawn down on one occassion. This would also go some way to supporting those who argue for greater compulsory super contributions, since it would be taxed concessionally.

  22. PF,
    I like your idea, and I think phasing out tax deductability of finance costs would also be sensible – just to balance the books. Might make a few accountants wince though. One issue with both of these may be how they play out in a globalised market where companies can shop for the most generous jurisdiction.

  23. I also like PuntPal’s idea of mandating LVRs.

    In fact I reckon the Reserve Bank’s lever for the economy should be the Deposit Percentage Required, and they should leave interest rates to market forces.

    Increasing interest rates doesn’t effectively reduce demand – especially when you can borrow 100%! People just stretch themselves further. Huge increases are needed to actually put people off buying (as happened in the early 90’s).

    Increasing the LRV on the other hand does reduce demand because it makes it impossible to borrow until you’ve saved more. And it would also automatically reduce the riskiness of loans at the time when it’s needed most.

  24. Well said, Rod Schiller. Argument is closed, and the brave are walking. As the saying goes, even though the dogs are still barking, the caravan is moving on.

  25. Darren, thanks for those comments. Your message must have been held up for a while. I agree, govt statistics are cooked. And when you consider that the markets are also manipulated and rigged by criminal sydicates (oh, sorry, we call them brokers, market makers, hedge funds and investment bankers), then it is not that farfetched to conjure up the image of being stranded on a life raft in shark infested waters and heavy seas, without even having a compass.

  26. Darren, I was referring to your first post.

    PF, that is an eminently sensible suggestion. I would go even further and mandate a minimum % interest to be payable on all CDs, so that savings would be encouraged regardless of the machinations and manipulations of the banksters. What effect would, say, 10% minimum mandatory interest have on all savings held in special savings accounts? What would you see to be the pros and cons of it, and who would be the winners and the losers out of such a system?

  27. PuntPal, I agree that the perversion of traditional financial values is deplorable. At the same time, it is not surprising, after decades of the system making losers out of savers, and instead making winners out of debtors. These days, if you do not partner the banksters and do your asset purchases through them, and thus giving them business and a big chunk of your income, then you are simply barred from having access to those assets. That’s what it has come down to, and even though we may whinge about it, less and less people want to keep pissing into the wind, and just go along with the rules of the game.

  28. cb, Rod Schiller
    what about the negatives against property
    1. Government stimulus being wound down
    2. Interest rates going up
    3. Foreign banks are turning away from Australia – cba and westpac using gov guarantees
    4. Westpac admitting we are too indebted – basically there is not much more room for more debt
    5. China is slowing down – our resource exports are weakening as can be seen by the LME stockpiles rising (except iron ore and coal and that wont keep the boom going)
    6. Mathematics learnt in primary school is advanced enough to prove that people cant afford the loans to buy a house

    there are more negatives than positive factors….

    However, i understand that this is the last stand of the spruiker… which is evident in the posting on this website – how? because the spruikers are running out of logical/factual arguments and are now resorting to using meaningless hogwash such as celebrity sponsoring to spruik property – ‘If Kylie Minogue is doing it – shouldn’t you??’

  29. GB, I would venture as far as to say that borrowing to buy has never been free of risks, even though the difficulties of getting into the market have varied from time to time. If the prospect of a housing price correction would keep someone awake at night, or would end up wiping their savings out, etc., then it would be more sensible for such a person to keep renting, instead of buying. To my mind, these arguments hold true independently of which part of the cycle we happen to be in.

    But, on the other hand, if one opts to rent because they are speculating in the expectation that prices will drop, this is quite a different matter, and I wish them good luck with their market timing. There is much ado being made by the editor of this forum about speculative buyer while nothing is being said about the speculative renter. At a time when the best experts disagree about the direction and future of the economy, I find that rather lopsided, and the shill against buying nothing short of incredible.

    What we know is this: if you buy, prices will fluctuate, but at the end of the road, in return for paying a little more to service your mortgage in comparison to simply paying rent, you will end up with a valuable asset, a debt free home, by the time you retire. Whereas if you do not buy and simply keep paying the rent, you might have a little more money to spend elsewhere now, but by the time you retire you will be still paying rent at the then market rate.

    When you look at the question of home ownership this way, there should be no contest as to which is the more sensible option, but you would get no hint of such a thing from the editor, would you? Instead, what you are being encouraged to do is to be a speculative renter, and make your quick fortune on his speculative small caps. Well, all I can say to that, is good luck to the followers, because the leader will probably be doing all right out of this doctrine.

  30. na na na ‘If Kylie Minogue is doing it – shouldn’t you??’
    why would she ? put her dough,extremely large amount in prop?
    cos it doubles due to spruikers hype up

  31. cb – cant you see the political dimensions to this. Dont you see that high house prices are not a good thing – politically. Rising housing prices, well that is something different. Think about if for a little bit.

    The Rudd Government (but more so the Howard Gov) were able to ride the bubble for a long long time. During this time, increasing house prices was politcally acceptable because although affordability was poor, there was always the prospect of further capital gains.

    But now those capitcal gains have been made and anyone with an ounce of common sense understands those houses prices cant continue to rise when the people expected to be buying those homes are in too much debt already. Furthemore, the insanity of a whole nation excited about paying more for their houses has finally sunk in. The boomers who have seen the value of their home go up (and were stoked about it!) are now seeing the flipside of this for their children. Those that can help, do help. Those that dont…well what do you reckon they do???

    Do they just accept it and come onto the Money Morning website to ‘whinge’ or do they slowly but surely build the foundation of a political movement that will expose the Scam of the Century for what it is…

    So in summary, your cynical and pessimistic approach in just accepting this is the way of the world (um, well not the world, just Australia really) may have suited the 90 and early 00’s. But post-GFC, with a realisation that debt – private and public – has got way out of hand, the mood is right for a massive reform.

    The GFC was allowed to occur because people are politically apathetic and economically naive. Once Australians realise they have been duped, they will be looking for scalps and solutions

  32. PuntPal, that is probably true. And yet, they will not be looking to sell at massive losses, unless the life is squeezed out of them first. So, I would not count things developing along the lines you are suggesting, but what sort of odds would you place on them?

  33. . Furthemore, the insanity of a whole nation excited about paying more for their houses has finally sunk in. The boomers who have seen the value of their home go up (and were stoked about it!) are now seeing the flipside of this for their children. Those that can help, do help. Those that dont…well what do you reckon they do???
    Do they just accept it and come onto the Money Morning website to ‘whinge’ or do they slowly but surely build the foundation of a political movement that will expose the Scam of the Century for what it is…

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